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Bank on the Regionals

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The past few days of weakness could be the beginning of a larger correction. Only time will tell if that's the case. For now, however, the selling appears to be an event-related shakeout courtesy of the toppling of some Middle East dictatorships. If the current weakness turns out to be just a shakeout (as opposed to a larger correction), then there could be some nice opportunities in store.

When panic sets in, people tend to sell first and ask questions later. Investors must then ask: was the selling reasonable? Were the stocks sold even impacted by the event that started the frenzy in the first place? After the dust settles and traders start looking for opportunities, the sectors with underlying demand should surface and show the strongest recoveries.

Regional banks might be one such group. Banks in general may be good candidates, and we could find reason to buy the money center banks as well. For now, however, we'll stick to banks that do not have international exposure (and therefore are theoretically insulated from overseas events). We aren't exactly sure why unrest in the Middle East would have triggered selling in these stocks. With no direct exposure to the Middle East, there's no reason for these stocks to be impacted by the unrest in that region.

The indirect impact of rising oil process could, at some point, slow the recovery. That, in turn, could impact the ability of these banks to lend or for borrowers to pay back loans. But it's a bit premature to worry about that scenario. Even if that was the rationale behind the selloff of these stocks, the reasoning seems to be based more on suspicion or fear than fact or probability.

As a group, regional bank stocks had been doing well in recent months, showing some strong advances. Many have reestablished their advances after a few months of consolidating price action. These rallies became somewhat extended as there were no intervening pullbacks. Until now. The broad-market selloff, which has impacted just about every stock and sector over the last three days, has finally provided an opportunity to establish long exposure in the regional banking sector with a reasonable risk-reward entry point.

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