Hey There Income Hunter,

The trend of high inflation looks set to continue for a couple of more months,  according to a hot-off-the-presses estimate by the Federal Reserve Bank of Cleveland.

This is not good news for financial assets.

Already tight financial conditions have yet to feed through the financial system so additional tightening will make economic fall worse and last for longer.

Banks were hit especially hard Thursday, with regionals down nearly 4%.

Today we’ll take a look at how much more of a correction we can expect from the US banking sector. 

Mega Banks vs Regionals 

At the start of an economic downturn driven by Fed tightening, the big boys get punished first.

That’s mainly because when the Fed is selling bonds into the system, the big banks hold a ton of assets on the balance sheet that get crushed.

Then as the tightening feeds through the financial system, loan defaults increase and that hits regionals in housing, autos and credit card financing.

Notice how M&T Bank (Ticker: MTB) has recently rolled over and is now leading the down turn for the banking system as a whole. 

We should see a continuation of this trend in the weeks ahead as loan default picks up and risks hurting the regionals more on a relative basis. 

Let’s take a look at the SPDR regional banking ETF (KRE).

Notice the breakdown once the Fed tightening cycle began …

There was the summer bounce when the market misread a potential Fed pivot back to easing and now we are in the next leg of the downturn. 

Loan losses and employment losses lag the rest of the economy …

So, I believe KRE will take out this year’s lows and continue down in the first half of 2023.

Bring It Home

The red circle above is where I put on a spread, and the gold dashed line is my target … 

I took half the trade off yesterday for a 50% profit and will ride the rest to my target and close the trade.

I sill reset on any bounce, because central banks in the west will continue tightening until they crush the economy and potentially break the financial system in the process.

Check out the upcoming rate hikes, which will be accompanied by quantitative tightening, which is even more painful on the banks …

The hikes will keep coming. With that flow into the market,financials are the most vulnerable.

Sell rips, and as always …

Live and Trade with Passion My Friend,

Griff