Bank stocks were a lagging sector in Monday’s higher market as weakness in Citigroup (NYSE: C) after a reverse stock split dropped a banking exchange traded fund close to a key test.

Citi shares were down more than 2% on Monday. The banking giant is the second-largest holding at over 7% of SPDR KBW Bank ETF (NYSEArca: KBE), the largest sector fund by assets with about $1.7 billion.

The ETF closed Monday’s session just above its 200-day moving average. A break of that support level could shake out some hands.

“Despite expectations for improving credit costs, we believe the KBW Bank Index is trading near fair value,” said analysts at Keefe, Bruyette & Woods in a note Monday. “Given current valuations coupled with the challenging prospects for revenue growth, we recommend investors be market weight large-cap banks.”

The ETF tracking the bank index is in negative territory for 2011.


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