I'm Buying More KeyCorp Amid This Treasury Market Beatdown
Here's how I'm trading my banking plays as the Dow Jones U.S. Bank Index surges.
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As we approach the afternoon on the day after former president Trump became President-Elect Trump, the yield for the U.S. ten-year note has moved all the way from 4.28% to 4.46%. In fact, everything from the two-year note on out is down for the day and everything from the five-year note out is catching a fairly nasty beating. The 30-year long bond now pays 4.64%, up from 4.43% earlier this morning. All while the short end of the yield curve hangs tight in expectation for an FOMC rate cut on Thursday.
This is impacting two industry groups among equities quite dramatically this morning. Within the financial sector, the banks and lenders are hot as heck. The financials sector SPDR ETF is up 4.26%, while the Dow Jones U.S. Bank Index is up 8.08%. My holdings in the space, KeyCorp KEY, Wells Fargo WFC and SoFi Technology SOFI are up 12.1%, 10.5% and 4.1%, respectively. Because you asked, JP Morgan JPM and Bank of America BAC are up 8.6% and 5.9%, in that order.
The other industry is being impacted negatively. The homebuilders are being routed as higher yields at the long end of the treasury yield curve means higher mortgage interest rates. Lennar LEN, D.R. Horton DHI, Pulte Homes PHM and KB Home KBH are down -9.4%, -9.6%, 4.9%, -3.9% for the day, respectively. Yikes.
More On the Banks
It's not just the improved prospects for increased net interest margin driving stocks higher post-election, it's also the idea that banking regulations may ease or at least stop getting stricter for a time. For me, as I have not been a huge fan of banking for a while, I remained long Wells Fargo, as I am expecting that they may get some relief at some point over the next year as the Fed potentially removes the asset cap that had been in place since the scandals that made news several years ago under different management. About six weeks ago, Wells Fargo submitted a third-party analysis of its own overhaul of risk and control processes to the Fed to help move this along.
As for KeyCorp, I always have at least one regional bank on my book just for the exposure, and I consider KeyCorp to be well-run. And SoFi Technologies is the online back and financial services firm run by CEO Anthony Noto, who I have a ton of faith in. That does not mean that I do not have faith in Wells Fargo CEO Charlie Scharf, who I think is the right person for that job at the right time.
Two Different Outcomes
At least, that's what the tea leaves (technical analysis) is telling me.
Readers will see that WFC sold off coming out of a rising-wedge pattern and then rallied out of a double-bottom reversal this summer. Relative strength has just spiked as the daily MACD repositions itself in a more bullish manner. The pivot coming out of that double bottom implies a target price of $74. The stock has traded that high this morning. I need to take a little something off of this position.
KEY, on the other hand, is breaking out of what is now a year-long but failed rising-wedge pattern. Relative strength and the daily MACD are both in great shape. With an upside trendline of that wedge running at $18, which I will use as a pivot, that would now put my target price at $23.
Therefore....
While not getting out of either stock, I will spend at least part of my afternoon working on a dollar neutral pairs trade that takes some profits in WFC and increases my allocation to KEY. I will leave SOFI alone, as that's an investment for future generations of Guilfoyles.
At the time of publication, Guilfoyle was long WFC, KEY and SOFI equity.
