Trading Nation

Don’t be scared of the swings – there’s a big boon for small banks ahead

Key Points
  • Regional bank stocks could see more shaky trading.
  • But don't be spooked by swings. This is still the space to watch, says market veteran Michael Bapis.
Trading Nation: Bank on the banks?

Regional banks could see more shaky trading on Friday after an unpredictable Thursday. But don't be spooked by swings. This is still the space to watch, says one market veteran.

"We would continue to own the space," Michael Bapis, partner and managing director at the Bapis Group at HighTower Advisors, told CNBC's "Trading Nation" on Thursday.

It's the perfect culmination of conditions for the small banks. Those factors include a strong U.S. economy, a rising rates environment that is widening credit spreads, and less financial regulation, says Bapis.

The effects of tax reform could prove a particularly strong tailwind for small banks — the direct benefits of the cuts signed into law late last year should go "right to their bottom line," he said.

It could also have indirect benefits for the sector. Expected stimulus from the changes to the tax code could speed growth in the U.S. economy, giving a lift to lending activity. Higher economic growth should then encourage the Federal Reserve to raise the fed funds rate at a faster pace, pushing banks to increase their own interest rates.

"As long as the economy stays strong, rates continue to rise, the spreads rise and the tailwind is still there with tax reform you're going to see this whole sector rise," said Bapis.

Small and regional banks have already been performing well this year. The S&P Regional Banking KRE ETF hit an all-time high on Wednesday and again on Thursday before retreating shortly after Thursday's open. For the year, the ETF has risen nearly 9 percent, almost five times the increase on the . The broader Financial Select Sector XLF ETF has added 4 percent this year.

One regional bank Piper Jaffray is betting on is Banco Popular. Craig Johnson, chief market technician at Piper Jaffray, says the stock looks good on a technical basis.

"This is a stock that has broken above resistance at $43," Johnson told "Trading Nation" on Thursday. "Next resistance comes in at about $46 so [we] still see some upside there."

Fellow Piper Jaffray analyst Brett Rabatin has an overweight rating on Popular and a price target of $51.50. That target implies 16 percent upside from current levels.

Popular is up nearly 25 percent in the year to date, looking to reverse a 19 percent decrease in 2017. In January, shares rose 14.5 percent in the stock's best monthly performance since August 2016. Its shares hit a multiyear intraday high of $46.83 in mid-February – a level not seen since early 2009.