Outperformance of Regional Banks Waning

Regional banks had a good run.

Over the past 15 months, the SPDR S&P Regional Bank ETF (NYSE: KRE) is up just shy of 58%. The gains made by these smaller banks outpaced those of the bigger banks, represented by the SPDR S&P Bank ETF (NYSE: KBE), which returned 48% over the same period.

But this trend – outperformance of smaller banks – looks set to end.

Rodney points out one reason: the expiration of the Transaction Account Guarantee (TAG), which disproportionately hurts the little guys.

I’ve found a technical clue that suggests big banks will outpace regionals in 2013. Take a look at this chart which compares the regional banks (KRE, in green) to the big banks (KBE, in orange).

See larger image

As I’ve done before, I’m using a ratio of the two prices to draw a conclusion on the state of the current trend. Here the calculation is KRE / KBE. So a rising ratio line (in yellow) indicates outperformance by the regional banks. That’s been the trend since 2010 – regionals beating out the big boys.

But that trend is reversing. The ratio line is now declining, suggesting the big banks are getting stronger and the regional banks are getting weaker — or both.

Either way, I expect investors will see better gains from the big banks in 2013, as the regulators continue to favor the too-big-to-fail (and too-expensive-to-bailout, again) institutions.

If you haven’t done so already read the Survive & Prosperissue on “Second Financial Crisis Ahead – Savers Revolt.

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Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.