Get 'overweight' on this sector: Trader

Trading Nation: Big banks still a buy?   

Big banks came under pressure Wednesday after agreeing to pay nearly $6 billion in fines for a rate rigging scandal.

Despite the negative headlines, however, investors shrugged off the news—with many of the bank stocks—including Barclays and UBS—closing higher. And some traders are interpreting that price action as a signal to buy.

"I think a lot of this news is already priced in," Larry McDonald of Societe Generale said on Wednesday's "Power Lunch." And according to McDonald, we could be entering a phase of extreme outperformance in the financial space, particularly in regional banks.

McDonald noted that the KBW Regional Banking ETF, the KRE, is outperforming the broader Financial ETF, the XLF by 4 percent year-to-date. A trend which he sees continuing as the Federal Reserve gets set to raise interest rates later this year.

"A rising yield environment tends to benefit financials, primarily banks," said McDonald. "As the yield curve steepens, we should see positive tailwinds for the [space]."

The technical set up for the financial space, particularly in regional banks, confirms McDonald's argument that the sector is poised for further upside.

"We like this area a lot. In fact, it's sort of a stealth outperformer," said Cornerstone Macro's Carter Worth. "If you look at an index like the BKX, which of course is dominated by money center banks, we broke out of this range that we've been in and that infers that regional banks are next."

Looking at a one-year chart of the Regional Bank ETF, Worth noted that while it has outperformed and rallied off of its low, it still hasn't reached its 52-week high. "The presumption is that just as the BKX has broken above its highs, the regional banks will do the same," added Worth.

Whether big or small, said Worth, "banks are a good place to be overweight."

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