This Trade Is Down, But Clearly Isn’t Out

Most investors didn’t expect the banking sector to get into trouble this year. Generally, rising interest rates are good for banks. They make fewer loans, albeit at higher rates. However, many banks used the low-rate era to invest in Treasury bonds at lower yields.

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  • That’s led to the second, third, and fourth-largest bank failures in U.S. history this year. It’s possible that they won’t be the last. But while the banking sector is down, it’s not quite out.

    Several regional banks are updating investors on their deposit levels, and the news is largely good. It’s helped Western Alliance Bancorporation (WAL) surge higher earlier this week. The regional bank is still down by more than half from last year’s highs, and trades at a 30 percent discount to its book value.

    Like many other regional banks, shares are beaten down and should head higher if they’re sound. But if not, they’re likely overvalued. The latest depositor data indicates that Western Alliance is likely in the former category.

    Action to take: Investors could make a small speculative position in regional banks like WAL. Just use a down day to get in… and don’t be shy about taking profits.  The company’s recent dividend works out to a 4.7 percent yield, although the bank may cut it.

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  • For traders, shares may be volatile enough right now without the need for an options play. But the September $45 calls, last going for about $3.00, could leverage a further move higher in shares in the coming months.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.


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