Banks are headed for a boost.
At least that's what the charts are telling Todd Gordon, longtime trader and founder of TradingAnalysis.com, who took a technical look at the SPDR S&P Bank ETF (KBE) and the SPDR S&P Regional Banking ETF (KRE) on Thursday on CNBC's "Trading Nation."
For much of 2019, bonds — which move inversely to yields — have climbed while yields sank, hurting "the earnings potential for those financials" and accelerating their underperformance relative to the S&P 500, Gordon said.
"But we've seen hope," he said. "We've seen a pretty strong move down in bonds [and] up in yields just recently, and you're starting to see a little bit of outperformance of the KBE relative to the S&P," tracked by the green line on the following chart:
Lucky for the bulls, that outperformance may be "a short-term indication of bank outperformance to the S&P as we head into earnings next week," Gordon said. Goldman Sachs, J.P. Morgan and several other big banks kick off the earnings deluge on Oct. 15.
Still, Gordon wasn't ready to send investors the all-clear signal.
"We'll see how earnings come out," he said. "We obviously have a lot of wood to chop above us."
The regional banks were also showing signs of strength, though, Gordon said. He noted that the KRE has been in a consolidation range for the last eight months or so, doing "absolutely nothing," with its 200-day moving average as the ceiling.
"We need to be breaking up through the [$]60 area to get through resistance," the technical analyst said.
That could very well come next week, according to the recent upturn in the KRE's relative performance to the Financial Select Sector SPDR Fund (XLF), which tracks financial stocks more broadly, he said.
"We're seeing a slight higher low here in regionals relative to the big banks. They have a higher beta," he said of the regional bank stocks, referencing a metric used to measure how a certain security moves versus the rest of the market. "If we do see a move up in banks, I think the regionals should outperform the big banks.
Gordon recommended one name to capitalize on a potential move higher in yields and strong earnings: PNC Financial, a member of the regional and broad bank ETFs. He said it's "showing a lot of relative strength relative to both regionals and the big banks," with some resistance around the $170 level, which it nearly reached in 2018.
Gina Sanchez, founder and CEO of Chantico Global, said in the same "Trading Nation" interview that she was avoiding the group altogether.
"It's really hard to get behind this story," she said. "Banks are going into this earnings season with ... negative estimate revisions, downgrades, and the market is continuing to slow, so fee income is continuing to get harder and harder to come by. And with rates having gone down as much as they have, it's just a tough ride for banks right now.
Two things happen before investors should bet on the banks, Sanchez added.
"You probably want to be closer to the end of the cycle; I don't think we're there yet. I think we actually still have several months to go before we're anywhere near the trough," she said. "And you have to have some deal happen with kind of the trade talks, and we don't see that likely happening either. There's optimism right now, and that is what's driving both yields and the banks."
But that optimism likely won't last, the CEO warned.
"I don't see that we are likely to get the kind of trade result that's going to settle the markets," she said. "I think this optimism is likely going to fail, as it has [failed] in the past."
The KBE and KRE were both more than 1% higher by Thursday's close, having largely led the day's rally.