Bank stocks are now oversold but it's not time to buy the dip just yet, DataTrek says

• Bank stocks are now oversold, but it's not time to buy in just yet, DataTrek's Nicholas Colas said.
• He said regional bank stocks could see more downside, pointing to data in previous financial crises.

With panicked investors fleeing from the fallout of Silicon Valley Bank, bank stocks are now oversold – but it's not time to buy the dip just yet, DataTrek said.

In a note on Tuesday, the research firm pointed to the plunge in bank stocks on Monday as Wall Street reels from the collapse of SVB.

Wall Street's top four banks suffered a stunning $55 billion wipeout last week as SVB went under, and regional bank stocks including First Republic, PacWest, and Charles Schwab plummeted on Monday as shareholders braced themselves for another 1980s-style banking crisis.

But the steep sell-off is likely overdone, according to DataTrek cofounder Nicholas Colas, who pointed to the KBE bank stock exchange traded fund. It has sunk 17% over the past 50 days, which is 1-2 standard deviations below its long-run average 50-day return.

Meanwhile KRE, a regional bank ETF, has plunged 23% over the past 50 trading days, which is 2 standard deviations below its long-run average.

But Colas warned investors against buying the dip in stocks just yet, as near-term downside could easily continue:

"Statistically speaking, therefore US regional banks (KRE) are much more oversold than US banks generally (KBE), but might they continue to be under pressure over the near term? Of course they could," he said.

That's because current losses still haven't reached the levels of past crises. When stocks plunged at the start of the pandemic, KRE's 50-day trailing returns ranged from -30% to -50%. During the Great Recession, returns were -25% to -41%.

"The 50-day return math says US regional banks are a 'Buy', but history (and the scars it leaves on investors' psyches) says 'wait,'" Colas warned, urging investors to look for at least another 20%-30% downside this week before jumping in. "Otherwise, waiting for the dust to settle seems like the more sensible strategy. As we sometimes mention during market dislocations, we've seen more Wall Street careers end by trying to pick bottoms than any other trading/investment mistake in the book."

Still, investors have already started buying up battered stocks. Regional banks posted a strong rebound in early Tuesday trading. First Republic jumped 58% after plunging 62% on Monday. Meanwhile, Western Alliance surged 39% after losing 47% on Monday.