While the big story of 2012 so far is the outperformance of the financial sector, including stocks like Bank of America (BAC) and Citigroup (C), savvier investors have long been highlighting the regional banks as a better way to add financial exposure to a stock portfolio. With less vulnerability to any potential European debt crisis spillover compared to the big money center banks, regional banks are allegedly positioned to benefit specifically from a recovering economy here in the United States.
In the short term, buyers have bid many of these banks to levels where, historically speaking, they have tended to be viewed as overbought.
As a result of this, banks when trading at or near current levels can become the target not just of investors looking to lock in gains from a recent rally, but the targets of short sellers, as well. These traders scour the market for stocks that have moved too far, too fast. These are the markets that might be especially susceptible to a selling panic if given just a little push in the way of new stock inventory hitting the market courtesy of the borrowing and selling by the shorts.
What are some of these stocks? Regional banks like Fifth Third Bancorp
(FITB) and BB&T Corporation (BBT) both continue to climb deeper into overbought territory above the 200-day.
Further, regionals like Zions Bancorporation (ZION) has closed higher for six days in a row below the 200-day moving average and is very overdue for a short-term pullback. These overbought regionals that are below the 200-day are all the more vulnerable to short-selling.
Given strength in the sector on Tuesday, there were precious few regional banks moving lower ahead of Wednesday's trading, let alone providing significant, short-term edges for active investors. One regional bank potentially worth keeping an eye on is Valley National Bancorp (VLY), which just climbed back above its 200-day moving average a few days ago. The stock finished lower on Tuesday after rallying for three out of the previous four sessions and becoming overbought, short-term.
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David Penn is Editor in Chief of TradingMarkets.com.
Disclaimer: The views represented in this column are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.
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