Many financial stocks have been on a tear since the Federal Reserve's surprise 75-basis point inter-meeting rate cut on January 22. For example, the KBW Bank Index -- which has an equivalent exchange-traded fund, the KBW Bank ETF (AMEX: KBE) -- has rallied 16.1%, beating the S&P 500 index by more than 10 percentage points.
Yet not all financial sub-groups have kept pace with the banks. For instance, after performing well in relative terms during the fourth quarter, insurers have stalled, with the KBW Insurance Index -- which has an equivalent exchange-traded fund, the KBW Insurance ETF (AMEX: KIE) -- more-or-less tracking the move in the overall market in recent weeks.
The difference in performance does offer up a potential short-term trading opportunity, however. Based on a quick read of the technical relationship between the bank and insurance indices, the recent pattern indicates that the former may have gotten a bit too far ahead of itself, at least in comparison to the latter.
Moreover, balance sheet and other concerns that have undermined the outlook for lenders are likely to remain more pressing in the near term than those that will impact the broader universe of financial companies. Under the circumstances, the recent dramatic divergence suggests it may be a good time to buy insurers and sell banks.
Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle.
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