The last time financials were this oversold they rallied by double digits

The banks got banged up this week.

The XLF financial ETF hit its lowest level in 13 months, while the KBE bank ETF tracked for its worst monthly loss since August 2011. Major banks JPMorgan, Citigroup, Goldman Sachs, Wells Fargo and Bank of America are all sharply lower over the past three months.

The steep sell-offs have one market watcher changing his mind on the sector.

"I've been quite negative on the group all of this year until now," Matt Maley, equity strategist at Miller Tabak, told CNBC's "Trading Nation" on Wednesday. "You look at either the KBE or the KRE, its weekly RSI [relative strength index] chart is getting very oversold. In fact, the last three times it got this extreme, the group bounced very sharply."

The KBE bank ETF has a relative strength index reading of 17, its lowest level since early 2016. Over the following year, the ETF surged 79 percent. The KRE regional bank ETF experienced a similar move in 2011 when it rallied 64 percent in the year after it got to extreme oversold levels.

The timing of the presidential cycle could also provide a tailwind to the group, says Maley.

"Every single midterm election year going back to the 1950s has seen a rally in the last two months. I think that the groups that are really beaten up, that are washed out, are the ones that are going to do the best," said Maley. "You don't want to buy it all at once, but it's going to be a good group come December."

Financials should also get swept higher in a market shift toward value names over growth stocks, according to Michael Bapis, managing director of Vios Advisors at Rockefeller Advisors.

"There's going to be a sector rotation from the high flyers, from the low earnings into the companies who can make money," Bapis said on "Trading Nation" on Wednesday. "Valuations are very attractive. The sector is trading at 10 times next year's earnings, and you buy companies like that with high dividend yields. You're going to win in the end."

Value stocks are typically prized for their low valuations and high dividend yields. The XLF ETF trades with a multiple of 11 times forward earnings, below the S&P 500's 16 times multiple. It has a dividend yield of 1.9 percent, though names like Wells Fargo yield as high as 3.4 percent.

Vote
Vote to see results
Total Votes:

Not a Scientific Survey. Results may not total 100% due to rounding.

Videos

Trades to Watch

Trader Bios

About

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

Read more

Connect