A rare buying signal was triggered in bank stocks that's typically led to monster returns

Published Mon, May 8 202312:11 PM EDT

Bank stocks could be due for a rally, if history repeats itself. Stocks in the sector have underperformed the S & P 500 by about 26 percentage points over the last three months (down 23% vs. up 3%), making it one of a handful of times since 1940 there's been such a large performance gap. But that could mean a turnaround is in the cards if the stocks perform in line with historical trends. After the few times bank stocks lagged the S & P 500 by more than 15 percentage points on a three-month return basis, the group has seen strong returns over the next three, six and 12 months, according to monthly data since 1940 analyzed by Ari Wald, head of technical analysis at Oppenheimer. It's a trend that's most poignant at the one-year mark after the signal is hit. Bank stocks have historically surged 27.6% in the year since the 15% threshold was met, while they've only gained 8.6% in average one-year periods without the signal. The stocks have also outperformed the broader S & P 500 on average over the three, six and 12 month periods after the signal was hit. To be sure, Wald didn't say whether the stocks are worth buying after hitting the indicator. Instead, he noted that there were higher-than-normal historical gains after bank stocks have trailed the S & P 500 as much as they have over the last three months. Bank investors have been on edge since the collapse of Silicon Valley Bank in March. Fears were then reignited by JPMorgan Chase's takeover of First Republic last week. Investors have narrowed focus on regional banks as they tried to predict if any other financial institutions will also close. The SPDR S & P Regional Banking ETF (KRE) , which is focused on regional banks, climbed 6.3% on Friday. Meanwhile, the Financial Select Sector SPDR Fund (XLF) , a fund that tracks financial stocks more broadly, advanced 2.5%. But both are still down for the month and year, leading some investors to wonder if now is the time to buy in if the sector has recovery ahead. The KRE was down more than 1% on Monday as regional bank stocks were once again under pressure. Notably, closely watched PacWest was able to avoid the regional bank downturn, adding 10% on Monday after surging almost 82% Friday. The industry-wide XLF stayed above the flatline Monday, helped by gains from other financial names. — CNBC's Michael Bloom contributed to this report