Retail traders are constantly exposed to so many indicators that their screens often become convoluted with different studies and graphics, blurring out what is really happening. However, all indicators come from one single source: the price action of a stock or any other instrument, so understanding the source is key before anything else.

However, price action alone will not give investors much of an answer, at least by itself. When analyzing the price action of a stock or exchange-traded fund (ETF), the individual asset should be taken into context with other similar asset classes or instruments so that a broader trend can be uncovered as a narrative. Today’s behavior between the financial sector, bonds, and energy sector prices can deliver this sort of narrative to investors.

Understanding what the price action in the SPDR S&P Regional Banking ETF (NYSEARCA: KRE) means relative to recent rallies in the broader S&P 500 is a start, which then takes on a bigger – and clearer – shape when considered next to the recent swings in the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT). Finally, there is one more layer of context in the inflation versus recession camps born off these relationships, and that is the United States Oil Fund (NYSEARCA: USO).

SPDR S&P Regional Banking ETF: A Divergence During an Easing Cycle

With the Federal Reserve reducing interest rates by 0.25 percentage points and signaling a slower pace of cuts in 2025, rate-sensitive asset classes could start showing bullish price action as the market anticipates the broader economic implications. This is where the divergence between the recent S&P 500 rallies and the Regional Banking ETF becomes interesting.

Why would a rate-sensitive industry like regional banks not rally on the news of an ongoing easing cycle and rate cuts? More importantly, why are other financial sector stocks doing much better than these smaller banks? The answer to that question is twofold, and here it goes.

First, banks like Goldman Sachs Group Inc. (NYSE: GS) and J.P. Morgan Chase & Co. (NYSE: JPM) show better price action than these regional banks because they are not as exposed to the domestic business cycle. When rates come down, these banks can take advantage of the market volatility in their trading divisions and increased dealmaking in investment banking.

Regional banks, on the other hand, depend more on business loans and local mortgages, two markets that are now in what could be called a contraction.

iShares 20+ Year Treasury Bond ETF: Bonds Reject Fed’s Decision to Cut

When interest rates come down, so do bond yields. However, right now, bond prices are coming off their recent highs (yields go up), which can be taken as a challenging stance against the Fed’s decision to cut rates.

The implications are that if the Fed keeps easing, inflation might make a comeback and drag business activity (domestic activity) lower due to the inability to pass down costs to consumers. This might be why the regional banks are diverging away from the broader markets and why bonds are falling right now.

Considering that some of the inflation-friendly trades have done well since the top in bonds and regional banks, such as the SPDR Gold Shares (NYSEARCA: GLD), investors can safely start to assume that today’s price action ahead of further Fed decisions is the market’s way of saying that they expect inflation to come back again.

Paul Tudor Jones and Stanley Druckenmiller were bold enough to make this view public. In recent interviews, they reiterated their economic views, agreeing on the common path back to inflation. So far, they have been right, as inflation trades have started to pay off.

United States Oil Fund: Warren Buffett’s Dominoes Are Lined Up

The last layer to confirm this potential inflation trade has to come through commodities, this time oil prices. As of December 18, 2024, oil rallied by over 1.6% to break past $70.50 a barrel. Considering that this spike took place the day of the Fed's decision to cut interest rates, investors can see how this entire mix is accretive to inflation pressures.

Then again, that might be what Warren Buffett saw coming when he bought up to 29% of Occidental Petroleum Co. (NYSE: OXY), a direct bullish bet on future oil prices. Another buyer looking for higher oil prices also came in the form of an institutional investor.

Those at FFG Partners decided to boost their holdings in the United States Oil Fund by 2.2% as of December 2024, bringing their net position up to $5.3 million today, another bullish gauge for investors to consider moving forward in this potential inflation behavior from other markets.