Buoyed by a rebound in the broader financial services sector and expectations that another interest rate hike is coming in the fourth quarter, the SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, is up 9% over the past month.
KRE and rival regional bank ETFs were banking on higher interest rates to boost their fortunes. Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.
KRE’s technicals have improved to the point that some technical analysts believe the ETF is on the cusp of a major breakout.
“Karlier this year, KRE broke above 2007 high levels. After breaking out, softness over the past few months saw KRE test 2007 high resistance levels as new support a few times,” reports ETF Daily News. “While testing this support, potential that KRE has created a bull flag pattern over the past few months. KRE short-term rally of late finds it testing falling resistance, which could be the top of a bull flag pattern.”
Bolstering the regional bank outlook, President Donald Trump has promised deregulation and tax reforms, which have also helped the finance sector outperform since the elections.
Related: 3 Insurance ETFs for a Rising Rate Environment
Opportunistic traders who want capitalize on the short-term volatility have a number of leveraged and inverse ETF options to enhance potential returns. For instance, the Direxion Daily Regional Banks 3x Bull Shares (NYSEArca: DPST) can capitalize on short-term views on further strength in the financial sector, or the Direxion Daily Regional Banks 3x Bear Shares (NYSEArca: WDRW) can express short-term hedge of the opposite.
“If KRE breaks out and climbs above old highs at the $58 zone, it could attract buyers on a breakout. An important breakout test is in play for KRE this week,” according to ETF Daily News. “Bank Index (BKX) is testing an important breakout level as well. What KRE and BKX does in the next couple of weeks, could be very impactful for the banking industry and broad market overall.”
For more information on the financial sector, visit our financial category.