Amateur trader Matt Kohrs said he lost nearly $30,000 betting on the recovery of First Republic, a bank seized by regulators last Monday. Burnt by the trade, the 28-year-old decided it made more sense to bet that regional lenders would decline.

He took short positions in PacWest (PACW), Western Alliance (WAL), Zions (ZION) and SPDR S&P Regional Banking ETF (KRE), an exchange-traded fund that tracks the performance of regional banks.

Thus far his unrealized gains are more than $17,000, according to screenshots of his positions shared with Yahoo Finance on Friday, after investors pushed down the stocks of numerous regional lenders for much of this week.

“I’m just doing the opposite thing because that’s what made money recently,” said Kohrs, who discusses his trades and other finance topics on a YouTube channel. He started live streaming in December 2020.

Kohrs was part of the meme-stock movement that gripped a younger generation of investors earlier in the pandemic as amateur traders banded together on social media to push stocks of certain companies higher.

Now some of these same investors are piling up bets against regional banks as volatility roils that industry following the seizures of three mid-sized institutions in the last two months.

"It's definitely a sentiment trade right now," Alexander Yokum, an analyst with CFRA Research, told Yahoo Finance Thursday.

Negative sentiment

The turn against banks is a newer trade for retail investors. In March, when the banking turmoil began, many were willing to buy the stocks at a discount and hope for a rebound.

That changed this week, according to data monitored by Vanda Research, when retail investors began taking short positions against a number of regional banks. The new funds they added to put options, which are considered a sign of negative sentiment, amounted to $45 million for the five-day period ending Thursday, well above averages.

That behavior matched actions taken by larger institutional investors like hedge funds that had the same sort of bets in place for some time. Those investors added another $100 million to put options over the same five-day period, according to Vanda, also higher than averages.

Marco Iachini, Vanda’s senior vice president of research, said big institutional investors are now selling these positions to retail investors, which is "helping push prices higher."

On Friday the stocks of several regional banks that were beaten down the first four days of this week recovered dramatically. PacWest was up roughly 82%, while Western Alliance was up 49%. Zions was up 19%.

The rally followed news that federal and state officials are assessing whether "market manipulation" caused the recent volatility in banking stocks.

The American Bankers Association called on the SEC to investigate short sales of banking stocks and social media activity that it argued was "disconnected from the underlying financial realities."

SEC Chair Gary Gensler said "the SEC is particularly focused on identifying and prosecuting any form of misconduct."

Some analysts also questioned the recent rout in regional bank stocks this week.

“We think there's a disconnect between the stocks and the underlying companies right now,” Timothy Coffey, managing director with Janney told Yahoo Finance Thursday.

One regional bank, Western Alliance, highlighted this perceived disconnect in a statement it released Thursday disputing a report in the Financial Times that it had considered strategic options, including a sale.

"It is shameful and irresponsible that the Financial Times has allowed itself to be used as an instrument of short sellers and as a conduit for spreading false narratives about a financially sound and profitable bank," it said.

'If he dies, he dies'

Another sign of intensifying interest among retail investors can be found across Reddit’s finance forums, including WallStreetBets, where regional banking is now a hot topic.

Western Alliance is the fifth-most mentioned stock on a series of Reddit forums tracked by social analytics aggregator Ape Wisdom, while First Republic is sixth and PacWest is seventh.

The sentiment on WallStreetBets shifted after interest rates were raised at the Federal Open Markets Committee Meeting on Wednesday. Commenters argued Federal Reserve Chair Jerome Powell was not being realistic when when he called the seizure of First Republic "an important step toward drawing a line under" the recent turmoil.

A popular meme summarizing the view, dubbed “JPOW’s message to regional banks at the FOMC Meeting,” shows Ivan Drago, the fictional Russian boxer in the 1985 movie Rocky IV, with Drago's famous quote: “If he dies, he dies.”

Kohrs, the 28-year-old investor who now has roughly 340,000 subscribers on his YouTube channel, said he bought shares of First Republic on March 14 after researching the bargains some investors picked up during the 2008 financial crisis.

Now he said he and other retail traders he interacts with on social media are all betting against the banks. He said he doubts they will provide the type of support they offered to some of their favorite beaten-down stocks earlier in the pandemic, like video game retailer GameStop (GME) or movie-house chain AMC (AMC).

“It's hard to see a group rallying behind a bunch of bankers," he said. "That just doesn't have the same nostalgic value of...GameStop or AMC.”

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