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2012: Year of the (Regional) Banks?


Regional banks have been strongly outperforming since late-Septemebr of last year, and outperformance may just be getting started in 2012.

"Only he who has seen better days and lives to see better days again knows their full value."
--Mark Twain

I've noted in a number of my prior writings (most notably the Lead-Lag Report) that one of the most important sectors of the market for investors to pay attention to is Financials given that 1) the entire crisis is debt-centric which directly affects bank liquidity, and 2) leadership in the group would likely be read as a very healthy sign for the global economy. While big banks have been very slowly starting to show some interest, it's actually Regional Banks that are showing the most movement.

Take a look below at the price ratio of the SPDR KBW Regional Banking Index (KRE) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/KRE is outperforming (up more/down less) the denominator/IVV.

I believe the relative trends in the above chart are very telling for the overall market. We all know that banks have been the heartache industry for investors over the past three years, as Consumer Discretionary and Industrials received more attention from money looking for returns following the March 2009 lows. Regional banks tend to have much higher sensitivity to the domestic U.S. economy than larger banks which have international debt exposure. As such, it should make sense that regional banks would do relatively well despite Europe.

Notice, however, that this did not happen as the eurozone crisis flared in early August. Regional banks severely underperformed during the Summer Crash of 2011, but have since violently recovered off of the late-September lows, significantly outperforming and now exceeding levels seen since then. The trend appears to unequivocally be trending higher. Whether this is because of Operation Twist by the Fed pushing down long-term rates or a sudden pick-up in housing activity in many ways does not matter. What matters is that regional banks, which are sensitive to the U.S. and small businesses, are finally attracting money, and that's bullish for 2012. It appears as though the Winter Resolution trend I have been arguing for (see From Fall Melt-Up to Winter Resolution) might express itself in a new bull market independent of Europe.

Twitter: @pensionpartners
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No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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