The Financial Sector Might Be Catching a Lucky Break

Adam O'DellFinancial institutions have had an incredibly tough time turnrning a profit since the Great Financial Crisis of 2008.

Some of that challenge was the banks’ doing… as they had to clean up the messes they made for themselves during the lending spree that led to the U.S. property bubble. But not all of it is the banks’ fault.

The rest of the blame falls on the shoulders of the Federal Reserve, which reacted to the financial crisis by pinning interest rates just a sliver above zero – in turnrn, killing the golden goose that banks have relied on for centuries.

So while the Fed succeeded in breathing life back into the stock market, financial stocks have sucked wind. Take a look at this chart, which shows the S&P 500 (SPY) about 35% above its October 2007 prices, while the financial sector (XLF) is still 31% below that level.

S&P 500 Versus Financial Sector XLF 2008 to Present

Financial stocks have been out of favor for nearly the entirety of the current bull market. But that tide has started to turnrn in anticipation of the Fed’s looming rate hike.

And regional bank stocks, in particular, are doing even better. These stocks are up nearly 12% year-to-date, easily beating the S&P’s measly 2% gain.

Here’s a ratio chart, which plots the price of regional bank stocks (KRE) divided by the price of the S&P 500 (SPY). As you can see, regional bank stocks have thrived alongside speculation of a 2015 rate hike. Take a look…

Regional Bank Stocks Divided by S&P 500 2009 to Present

If the broad stock market manages to catch (and maintain) a bid for the next several months, through its seasonal sweet spot, regional bank stocks are poised to outperform.

Adam O’Dell, CMT

Chief Investment Strategist, Dent Research