A Billionaire Is Catching This “Falling Butter Knife”

By TradeSmith Research Team

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They say you should never try to catch a falling knife.

When you do, you risk buying a stock in steep decline too early — just missing the “handle” and wrapping your greedy fingers around a jagged, rusty blade.

But when you buy at just the right time, it can be incredibly profitable. (Look no further than Monday’s Daily, where we caught the falling knife of long-term Treasurys for a 100% gain.)

The trick is knowing which knives to catch. You should avoid the razor-sharp, saw-toothed, short-handled knives in the market… The trades with far more risk than reward.

Instead, look for the dull ones. The “butter knives” with a long handle and a harmless, rounded blade.

These are the trades with limited downside — where even if you buy too early, you’re not likely to get cut too badly.

I’m pretty sure I’ve found the latter kind today. One sector looks to me more like a falling “butter knife” than anything remotely dangerous.

And I’m not alone: one of the world’s most successful hedge fund billionaires, an expert in the exact kind of problem the stocks in this sector face, clearly agrees.

Let me show you why…

The Former Bond King Is Catching the ‘Butter Knife’

Bill Gross is one of the world’s most successful money managers. He founded the Pacific Investment Management Co. — better known as PIMCO — in 1971. It would eventually swell into a $2 trillion financial institution so systemically important, the Federal Reserve asked it for help in the wake of the 2008 financial crisis.

His PIMCO Total Return Fund, created in 1987, generated annualized returns of 7.8% until he left for asset manager Janus Henderson in 2014. And he did this exclusively trading bonds and bond derivatives, like futures and options.

Gross’ swan-song years at Janus didn’t live up to his legendary run at PIMCO. His Global Unconstrained Bond Fund returned less than 1% on average from 2015 to 2019, which we all should remember as some of the best years of the bull run. Clearly, the Fed’s zero-interest-rate policy proved challenging to fixed-income investors even at Gross’ level.

But the reason I bring up Bill Gross is because, for a great many years until that final spell of poor returns, he was considered the “Bond King.” Safe to say, Bill Gross understands bonds. Which means he understands debt. And if you understand debt, you understand very well what’s going on under the hood of one of the most hated market sectors in 2023: Regional banks.

Quick catch-up time…

Back in March, several high-profile regional banks got blown up due to a toxic mix of long-duration Treasurys with rates locked in below the pace of inflation and a nasty narrative about their insolvency. Customers ran on the banks, fearing the safety of their deposits, and they were right to. Soon, Silicon Valley Bank, Signature Bank, and First Republic Bank all went under — among others — and the Federal Deposit Insurance Corp. (FDIC) had to step in.

Since then, the regional banking sector has more or less dropped off a cliff. It’s down more than 25% year-to-date. Take a look…

However, regional banks are looking ripe for a comeback here.

There’s clear-as-day positive divergence and bullish crosses on the Relative Strength Index (RSI — the middle section of the chart) and the moving average convergence/divergence (MACD — the lower section) technical indicators.

Also note that this is on a weekly chart. Candles on this chart are plotted once per week, which makes this a potential longer-term trend — likely playing out over the next three to six months.

This chart alone has me champing at the bit to buy quality regional bank stocks as a trade over the next several months.

But then there’s this.

Who else but the former Bond King himself also thinks regional banks — with all their exposure to underwater long-term debt and commercial real estate loans — have hit bottom?

Here’s Bill Gross on X…

When a billionaire makes a call like this, we should pay attention.

When a billionaire who’s made his fortune by being an expert in the bond market makes a call like this — the same bond market that caused so many problems for this sector — we should pay very close attention.

Yesterday, Lucas Downey made a strong case that we’ve seen the peak in interest rate hikes from the Fed. That could mean we’ve seen, or are near, a peak in Treasury yields — especially if the Fed starts to cut rates next year as many expect.

Lower rates would help regional bank stocks immensely. And this may be where the former Bond King’s head is at.

Now, could Bill Gross be wrong? Of course. Billionaire or not, he doesn’t have a crystal ball any more than you or I do.

But with that relief coming to the regional banking system, and the historical proof that shows these sectors benefit most in the aftermath of rate-hiking campaigns, it’s only prudent that we nibble on some exposure to regional banks here.

And the simplest way to do that is by buying the S&P Regional Banking ETF (KRE).

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily