Trader says this is the beginning of the end for the bank rally

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After getting crushed as one of the worst-performing sectors in 2018, financials have started to show signs of life.

The XLF ETF, which tracks the sector, is up nearly 8 percent year to date, roughly in line with where the broader market is trading. However Dan Nathan of Risk Reversal said there’s a number of factors suggesting the rally of late may be coming to an end.

“I think we were all in agreement that the underperformance for all of 2018 was a really bad tell for this group,” Nathan said Friday on CNBC’s “Options Action.” The XLF ETF fell nearly 15 percent last year.

Last week, regional banks SunTrust and BB&T announced a $66 billion merger, forming the sixth-largest bank and marking the biggest financials deal in a decade. However, Nathan added that while the deal was “supposedly done out of strength,” historically M&A activity in the space has acted as a downside precursor for the markets – such J.P. Morgan’s infamous purchase of Bear Sterns in 2008.

“It’s really interesting the S&P 500 was in a little bit of a correction at that point, it rallied 15 percent after that,” he said. “People thought it was swept under the rug [but] subsequently from May 2008 to the lows in [2009] it dropped 50 percent.”

According to Nathan, the bond market has also flashed warning signs of late with the 10-year treasury yield now moving into negative territory on the year and trading around 2.6 percent.

“Maybe we have been in a decadeslong generational topping process where yields are never going up,” Nathan said “I don’t think that’s good for the banks right here. I don’t think it’s good for the global economy and the economy.”

Nathan advises investors to keep an eye on Citigroup going into its first-quarter earnings this spring. While the stock is up 18 percent this year it has failed to make a new 52-week high since last February when it was trading around $78.42.

“There’s going to be some stuff going on in Europe, whether you like it or not I think this is a great opportunity to pick on a name like Citigroup right here,” he said.

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