Fallout from Big Bank Legislation May Help Small Banks

Jan 21, 2010: 1:24 PM CST

The news is abuzz with the recent announcement by President Obama to increase regulation on large banks deemed ‘too big to fail’ and the broader financial sector and stock market is selling off… but there’s an overlooked silver lining that may emerge that investors and traders might be missing – what’s bad for big banks may very will benefit small, regional banks.

Let’s take a look at a few quick charts.

First, the broad “Dow Jones Financials Index”:

The broader financial index ($DJUSFN) is off over 2.50% currently, while the Dow Jones US Banks Index ($DJUSBK) is down just over 3.0%.

This is a result of the larger capitalization institutions dragging down the broad index which includes smaller companies.

While big bank stocks are declining over 5% on average today, the same cannot be said for smaller, regional banks… some of which are up over 5% on the day.

Next, the Dow Jones Regional Bank Index:

The Dow Jones Regional Bank Index ($DJSRBK) is up 1.6% today after rising solidly in January from 180 to 200.

Despite the broad market falling sharply today, the regional (small) bank index is higher – that’s bullish.

Let’s now turn from the broader indexes to a random selection of two stocks in these indexes.

JP Morgan Chase (JPM):

JP Morgan (JPM) is down almost 6% today after crashing through the 20 and 50 daily EMAs for support.  There is another level of support at $40, but under that, it looks like a continuation of the move down is likely.

I could have shown a chart of any of the following (data as of 1:00pm EST):

Goldman Sachs (GS):  Down 5.52%
Bank of America (BAC):  Down 7.0%
Morgan Stanley (MS):  Down 5.5%

The common thinking is that all financial stocks are suffering hard today – and that’s not true.

Let’s look at a few ‘small banks’ or regional bank stocks – some of which are surging strongly today:

Regions Financial (RF):

Unlike its large bank cousins, Southeastern regional bank Regions Financial is up 6% so far and – like the broader Regional Bank Index shown above – has been rising all of January.

I could have shown a chart of any of the following small banks:

Fifth-Third Bankcorp (FITB):  Up 9%
Zions Bankcorp (ZION):  Up 6.5%
BB&T Corp (BBT):  Up 3.5%

Keep in mind also that there is a national campaign that encourages those who are angry with large institutions to then move their money to smaller local banks, which may also be contributing in part to the recent price moves.

So instead of painting the entire financial sector with an “Ohhh, this is horrible” brush stroke, break down your analysis into larger banks which will be harmed if the president’s proposal is enacted, and the smaller banks which just might benefit.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

6 Comments

6 Responses to “Fallout from Big Bank Legislation May Help Small Banks”

  1. ibiza2000 Says:

    I thought we might have another rounded reversal today when price broke the 50. But no such luck! Dangit!

    On the pullback it appeared to be holding at the 20ema so I entered there. As soon as it the 20 broke I exited for a loss. I'm always nervous trying to play for rounded reversals, but yesterday's was so beautifully perfect I couldn't resist going for it again.

    I did catch the short off the 20ema earlier in the day – so at least I got that one right!

  2. ibiza2000 Says:

    In hindsight maybe I should have waited for it to break back above the 50 again before entering. I'm always so impulsive. I think I was right to be looking for it to hold the 20 on a pullback, but was too quick to jump in.

    However, I noticed there was a momentum divergence and a slight $tick divergence on the 1pm low, and after that it never could break below -500 on tick, then spiked to 1000 on the break of the 50ema. There was also a Wyckoff sign of strength on momentum and $tick on that high at 2:30. So at that point I was expecting a pullback to the 20ema and then a rounded reversal move. Of course it's always a risk going long the market when ADD is -1500 but it seemed like a decent play. I always analyze my losing trades to see if I did something stupid or not. What do you think? Was my only mistake the early entry (not waiting for price to re-break the 50ema) or should I have not even taken the trade at all!

  3. Top Ten SP500 Leaders and Laggards on January 21 | Afraid to Trade.com Blog Says:

    […] “Fallout from Big Bank Legislation May Help Small Banks.” […]

  4. ibiza2000 Says:

    I thought we might have another rounded reversal today when price broke the 50. But no such luck! Dangit!

    On the pullback it appeared to be holding at the 20ema so I entered there. As soon as it the 20 broke I exited for a loss. I'm always nervous trying to play for rounded reversals, but yesterday's was so beautifully perfect I couldn't resist going for it again.

    I did catch the short off the 20ema earlier in the day – so at least I got that one right!

  5. ibiza2000 Says:

    In hindsight maybe I should have waited for it to break back above the 50 again before entering. I'm always so impulsive. I think I was right to be looking for it to hold the 20 on a pullback, but was too quick to jump in.

    However, I noticed there was a momentum divergence and a slight $tick divergence on the 1pm low, and after that it never could break below -500 on tick, then spiked to 1000 on the break of the 50ema. There was also a Wyckoff sign of strength on momentum and $tick on that high at 2:30. So at that point I was expecting a pullback to the 20ema and then a rounded reversal move. Of course it's always a risk going long the market when ADD is -1500 but it seemed like a decent play. I always analyze my losing trades to see if I did something stupid or not. What do you think? Was my only mistake the early entry (not waiting for price to re-break the 50ema) or should I have not even taken the trade at all!

  6. Top Ten SP500 Leaders and Laggards on January 21 | Penny Stock Trading System Blog Says:

    […] “Fallout from Big Bank Legislation May Help Small Banks.” […]