KRE - an ETF to play a 1Q rally

Until today, the stock market had lost its year-end traction, and it is exclusively due to the unresolved Federal budget and the looming Fiscal Cliff and debt ceiling. Optimism among investors that something will certainly get done had fallen victim to political theater and the reality that our elected officials view compromise as a sure path to losing their next election. Nevertheless, investors have flashed signals that they are ready to rally in the event of any sort of Federal budget deal. And as I write this on New Year's Eve, a deal appears to be close at hand (nothing like taking it to the very last minute), and in response the major averages have either held or recaptured their psychological thresholds: Dow above 13,000, S&P 500 above 1400, Nasdaq above 3000 and Russell 2000 above 800.

Investors might be interested in an ETF with solid fundamentals that appears poised to perform among the best in a bullish environment. With a perfect Sabrient Outlook Score of 100 and a strong Bull Score, the SPDR S&P Regional Banking ETF (KRE) fits the bill.

Sabrient's SectorCast model creates relative rankings of sectors and industries based on the bottom-up aggregation of key scores for the constituent stocks. Our proprietary Outlook Score employs a fundamentals-based multi-factor model that considers forward valuation, return ratios, earnings growth prospects, the dynamics of Wall Street analyst estimates, the quality of reported earnings, and the aggressiveness of accounting practices. In addition, our Bull and Bear Scores identify how a given equity is expected to perform in a bullish or bearish market.

The Outlook score is forward-looking based largely on the dynamics of Wall Street analyst sentiment, whereas Bull and Bear are backward-looking indicators of recent investor sentiment. As a group, these three scores can be quite helpful for positioning a portfolio for anticipated market conditions.

KRE has a low forward P/E, strong return on sales, and steady support among Wall Street analysts. Financial stocks tend to lead during bull markets, and with the Fed having vowed to keep interest rates low for the foreseeable future, regional banks in particular are well positioned to reap the benefits of expanded lending to small businesses and real estate investors. The more well-known Financial sector ETFs like IYF and XLF are held back in our rankings by their heavy weightings in the mega-cap banks. But KRE is categorized by Morningstar in the "small-cap value" style box and contains none of the big banks, which should help it to flourish in a bullish climate.

The largest holdings in KRE include CapitalSource Inc (CSE), Popular Inc (BPOP), M&T Bank (MTB), Signature Bank New York (SBNY), and First Republic Bank (FRC), most of which carry Buy ratings from Sabrient.

However, stay vigilant. If the U.S. economy were to go south, perhaps due to continued intransigence in the Federal budget negotiations or renewed distress in the eurozone, KRE's relatively low Bear score makes it more likely to underperform in a weak market, especially if we see a stalled housing recovery and resurgence in failures among regional banks.