Banks are sitting out the big rally, and some see more downside coming

The market is roaring, but bank stocks are barely making a sound.

Bank stocks and the broader financial sector have posted meager gains this year, with banks gaining around 2 percent and the financials just barely positive. That performance stands in stark contrast to the broader indexes, with the S&P 500 rallying nearly 9 percent and the Nasdaq composite up 16 percent.

This price action comes even as interest rates are on the rise, with the Federal Reserve still on a path of hiking rates; that should prove to be a boon for the banks, with the potential for rising borrowing costs. The 10-year Treasury note yield broke above 3 percent Friday for the first time since early August, and bank stocks were just slightly higher. Banks failing to rally meaningfully is concerning to Matt Maley, equity strategist at Miller Tabak, who highlighted the trend in a recent note to clients.

"Remember at the beginning of the year, we had people calling for 3.5 percent, 4 percent, or higher [on the 10-year Treasury note yield]. That hasn't panned out. These bank stocks haven't rallied either," Maley expanded Thursday on CNBC's "Trading Nation," adding too that utility stocks have rallied in the face of rising rates, when typically they suffer.

"I think these two groups are telling us that they do not see a big breakout in interest rates, at least in the long-term interest rates, anytime soon," he said.

The banks' tepid gains come as the yield curve is flattening, Mark Tepper, president and CEO of Strategic Wealth Partners, pointed out on "Trading Nation." A flattening yield curve depresses banks' net interest margins, and typically in turn hurts the stocks.

At this juncture, Tepper advises investors to stay selective within the group.

"We are a believer in higher interest rates, we do think they're going to go higher over the course of the next year, but we also have a contrarian perspective on what that actually means for bank stocks. Yes, rising interest rates can in theory help net interest margins, but they can also curb lending," he said, which could hurt banks.

Tepper added that the housing market has already come under pressure as rates are on the rise, and that could also prove negative for the institutions. He's broadly neutral on the banks, but would stick with mega-cap banks here versus their regional, smaller counterparts.

"Reason for that is, we're also believers in volatility, and that is going to help to drive trading revenue, so at this point steer clear of the regional banks since they're more dependent on housing and business lending, and stick with those mega-cap banks," Tepper said.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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