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A Concerning Weakness In Bank Stocks

Wayne Duggan

Coming into 2018, many traders expected the environment of rising interest rates, financial sector deregulation and a booming U.S. economy to create the perfect environment for bank stocks. Unfortunately, the Financial Select Sector SPDR Fund (NYSE: XLF) is down 1.7 percent so far this year, and PreMarket Prep co-host Dennis Dick discussed the troubling trading action on Friday's show.

Watching Europe Closely

European banks such as Deutsche Bank AG (USA) (NYSE: DB) aren’t out of the woods yet, and U.S. banks stocks aren’t as cheap as they may appear, Dick said. 

“I’ve said publicly that I’m bearish the U.S. banks, and I continue to be bearish on the U.S. banks because I don’t know what is going on in Europe,” Dick said. “I don’t like the pricing action of any of the European banks."

Deutsche Bank shares are down 36 percent in the past month after the Wall Street Journal reported the U.S. Federal Reserve placed assigned a “troubled condition” to Deutsche Bank last year. Shares of European bank stocks Lloyds Banking Group PLC (ADR) (NYSE: LYG), Barclays PLC (ADR) (NYSE: BCS) and Credit Suisse Group AG (ADR) (NYSE: CS) are all down between 3 and 13 percent in 2018.

All About The Yield Curve

While the S&P 500 has rallied 1.6 percent in the past month, Bank of America Corp (NYSE: BAC), Goldman Sachs Group Inc (NYSE: GS), Citigroup Inc (NYSE: C) and JPMorgan Chase & Co. (NYSE: JPM) are all down more than 5 percent in that time.

TD Ameritrade senior trading specialist Shawn Cruz told Benzinga rising interest rates aren’t as important for big banks as the slope of the yield curve.

“Even with a strong economy, a flat yield curve isn't good for banks,” Cruz said. “European banks are having a tougher time than U.S. banks because they don’t have a solid economic growth story to lean on.”

Bank investors need the 10-year Treasury yield to move above 3 percent to potentially serve as a bullish catalyst for stocks, Cruz said. 

Dick isn’t convinced and said Deutsche Bank could be the canary in the coal mine for the S&P 500.

“If Deutsche Bank goes below $10, I’m not only going to say the U.S. bank stocks start making new lows, the S&P will start to roll over too,” he said. 

Deutsche Bank shares traded down another 1 percent Friday to $11.11.

Related Links:

How Deutsche Bank's Performance Has Ranked Since The Fed Began Controlling Hiring, Risk-Taking

With The 'Easy Trade' In Financials Now Over, BMO Sees 4 Cheap Bank Stocks With Catalysts

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