Bank selling is 'ridiculous'—time to buy: Trader

Has the deep dive in bank stocks finally made these names attractive enough to buy?

Banks have been beleaguered this year by concerns over continued low interest rates and exposure to energy loans. The S&P 500 financial sector has been the worst performer of 2016, down more than 17 percent year to date.

However, David Seaburg, head of sales trading at Cowen and Co., said the tumble has created a good buying opportunity for investors looking to bet on the banks.

"The selling pressure on these has been ridiculous," Seaburg said Thursday on CNBC's "Trading Nation." "I'm shocked to see [Bank of America] trading here" at $11.

Within the financial sector, bank names have fallen 23 percent this year. As stocks dropped 1 percent on Thursday, banks saw even more pain, falling more than 4 percent even as major lenders have traded below their tangible book value.

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"During periods of extreme negativity, you see complete dislocation in different sectors," Seaburg said. "I'd start to look to buy some of these on weakness."

Piling on to bank troubles is political risk, said Nicholas Colas of Convergex. Such a risk factor has been difficult for investors to value, he added.

Presidential front-runners from both the Republican and Democratic parties have publicly criticized Wall Street banks. "It is time to break up the largest financial institutions in the country," reads Bernie Sanders' Web page on Wall Street reform. Ted Cruz has said large financial institutions are "in bed with big government," and Donald Trump has said hedge funds can "get away with murder."

"Somehow the banks on Wall Street have replaced the health-care sector as the No. 1 punching bag during this presidential campaign," Colas said Thursday on "Trading Nation."

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A flattening yield curve has also added to the uncertainty surrounding banks, Colas pointed out. The spread between the 10-year Treasury note and the two-year Treasury note has dipped to its lowest levels since 2008. As long-term rates have fallen and short-term rates stay low, banks will face mounting pressure on net interest margins.

Despite these challenges, Colas agrees that the banks have been oversold this year.

"It's a value trade, but it's a tough trade," he said.

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Contributors

TradingAnalysis.com founder

Senior Director, Société Générale

Managing Director, Head of Technical Analysis, Evercore ISI

David Seaburg

Managing Director Head of Equity Sales Trading, Cowen and Company