Here we go again…
Fresh regional bank headlines crossed the wire at 7:40 this morning, as PacWest Bancorp (PACW) shares dropped 20% in the pre-market trading session.
The headlines meshed well with others from earlier in the week that implied that all of the banks – that’s right ALL – are seeing a draw on deposits, as we’re all looking for higher interest rates along with some ongoing fears around the banking system.
So, I hate to harp on a familiar point, but the regional bank activity is telling us we’re not done with this storm.
At the end of the day, this is sort of like the opposite of the boy who cried wolf…
I’m OK with yelling at the top of my lungs that there’s a serious problem lurking around the corner when I know it to be true.
But the regionals aren’t the only things that have my antennae ringing after this morning’s opening bell.
From a broader perspective, many of the regional banks trade in the small-cap Russell 2000 Index, which is why you and I remain bearish on this “risk-off” trade.
Let’s look at the stocks I’m watching and trading today…
Regionals Need to Be on Your Screen (KRE)
Sure, the regional banks are good for a day trade to the downside today as a result of the headlines, but there’s easier money to be made on this sector by trading the longer-term trend.
The SPDR S&P Regional Banking ETF (KRE) shares are going through a process of grinding through what I call “volatility ranges.”
What that means is the ETF will spike lower on headline risk, then spend a few weeks consolidating before making its next move lower on another volatility breakout.
The fundamental outlook for the regional banks is not good based on the tightening credit environment and the slowing economy. This means the longer-term trend will continue to favor the KRE targeting $30 and lower.
Sure, you can make a few bucks on the daily volatility, but I prefer to trade the long-term trend here with September options on the KRE, which are still relatively cheap given the increase in implied volatility on the closer-dated expirations.
Walt Disney Co (DIS)
The “Mouse House” dropped a disappointing earnings report at investor’s feet last night, setting the stage for a showdown with a familiar price level. The price level isn’t $100, that’s already gone… it’s $90.
The focus of the earnings report’s weakness was Disney’s streaming services, but there’s also another fundamental lurking out there.
The data is pointing to a slowdown in the consumer. As of now, the higher-income households – which are typically responsible for 60% of consumer activity – are slowing their spending. This slowdown will move down the income chain, affecting companies like Disney a little down the road.
For now, 85% of the analysts covering DIS shares have it ranked a “buy.” Strangely, we’ve not seen any reiteration of these recommendations today. Whenever I see that in the wake of an earnings miss, I take note, as it usually means we’ve got downgrades coming.
Target $80 on DIS over the short-term with the potential of a $70 target over the next six months for you long-term options traders.
Amazon.com, Inc. (AMZN)
The Nasdaq 100 is trying to hold its bullish ground with the help of “Triple-A.” No, not the roadside service organization, Apple Inc (AAPL), AMZN, and Alphabet Inc. (GOOGL).
All three are making moves higher, but AMZN is the one I’m watching closely.
Shares of this ticker just broke through their 200-day moving average (MA2000, a move that the other tech leaders made in February and March.
The break of the MA200 targets the next big “line in the sand” for AMZN, which is the stock’s 20-month moving average. That long-term trendline is the line of demarcation between a bull and bear market, and it sits at $125 (about 10% from current levels).
You could trade this by continuing to be long the QQQ or focus on the stock here by trading the July $110 calls with a target of $125 for the underlying as your exit.
May 11 2023