To Run with the Bank Bulls, Bet on the Regionals

While the big story of 2012 so far, is the outperformance of the financial sector, including stocks like Bank of America (NYSE: BAC) and Citigroup (NYSE: C), savvier investors have long been highlighting the regional banks as a better way to add financial exposure to a stock portfolio. With less vulnerability to any potential European debt crisis spillover compared to the big money center banks, regional banks are allegedly positioned to benefit specifically from a recovering economy here in the United States.

In the short term, buyers have bid many of these banks to levels where, historically speaking, they have tended to be viewed as overbought. As a result of this, banks when trading at or near current levels can become the target not just of investors looking to lock in gains from a recent rally, but the targets of short sellers, as well. These traders scour the market for stocks that have moved too far, too fast. These are the markets that might be especially susceptible to a selling panic if given just a little push in the way of new stock inventory hitting the market courtesy of the borrowing and selling by the shorts.

What are some of these stocks? Trading in bull market territory, regional banks like Fifth Third Bancorp (NASDAQ: FITB) and BB&T Corporation (NYSE: BBT) both continue to climb deeper into overbought territory above the 200-day. While the temptation to chase these stocks higher may be great, the fact that both stocks are so exceptionally overbought suggests strongly that FITB and BBT could be available at significantly lower levels over the next few days if traders are patient enough to wait.

Among those banks still trading in bear market territory are regionals like Zions Bancorporation (NASDAQ: ZION), which has closed higher for six days in a row below the 200-day moving average and is very overdue for a short-term pullback. These overbought regionals like this that are below the 200-day are all the more vulnerable to short-selling. ZION has a short-term, negative edge of just under 1% ahead of trading on Wednesday.

Given strength in the sector on Tuesday, there were precious few regional banks moving lower ahead of Wednesday’s trading, let alone providing significant, short-term edges for active investors. One regional bank potentially worth keeping an eye on is Valley National Bancorp (NYSE: VLY), which just climbed back above its 200-day moving average a few days ago. The stock finished lower on Tuesday after rallying for three out of the previous four sessions and becoming overbought, short-term.

Can’t get enough stocks? Click here for more!

David Penn is Editor in Chief of TradingMarkets.com.