Todd Gordon on Regional Banks

Last week, Todd Gordon appeared on CNBC's 'Fast Money' to give his thoughts on Regional Banks and the Financials sector as a whole, following the merger between SunTrust (STI) and BB&T (BBT).

Todd begins by mentioning that Regional Banks (KRE) are outperforming Financials (XLF) on a relative basis. To me, this is a very positive sign for the space, as it shows there is "risk appetite" for the smaller Banks within the sector. This relationship has traded in a range for almost 8 years, and it looks like we could see the strength begin to move back towards the top of this range in the coming weeks/months.

Specifically, Todd goes on to say that he likes two banks in particular: Bank of America (BAC) and Zions Bancorp (ZION).

In regards to Bank of America, I think this is a very healthy chart. During the Q4 correction in broad indices, BAC failed to fall below support that it has held since late 2016, around $22.50. The stock then quickly reversed, breaking through its downtrend, and is now sitting above near-term support at $28.00. As long as we hold above these levels, I think it's a great stock to own.  

Moving on to Zions Bancorp, I also see this as a stock that is making productive moves higher. As long as we can maintain the $46.00 level, it's a healthy chart. Similar to Bank of America, we have broken through the downtrend and have continued upward. On top of this, the longer ZION can spend time hovering around the 70 level on the RSI, it bodes well for the stock. 

Todd also mentions that if the spread between the 10-year Treasury Yield and the 2-year Treasury yield remains subdued, then this will weigh negatively on the Banking industry and the underlying constituents. While this relationship has improved since the lows we saw in December, we want to see the spread increase, preferably back above the 0.2 level, as shown in the chart below.

Overall, I believe Financials should not be considered an "overweight" position in portfolios, but there are some select areas and individual names that are showing healthy signs, particularly in the Regional Banking complex. With the merger between SunTrust and BB&T, I think traders and investors will look to find more banks that could see M&A activity themselves over the coming months.