This past week the markets have been reacting to the prospect of one federal rate hike or more from the U.S. Federal Reserve before the end of this year. Financial stocks are busting out all over the place … and it looks like there is more to come.
The volume-at-price chart for XLF also shows reason to be optimistic. XLF has recently broken solidly out of its overhead volume resistance area.
We haven’t seen new highs in XLF just yet … but I won’t be surprised to see them sooner rather than later. My proprietary time-cycles analysis on XLF suggests further strength to come as well.
The simple explanation for the recent strength in financial stocks is that the prospect of Fed-based interest rate hikes is good for banks because it improves their net interest margin (NIM). NIM is the difference in the interest rates that the banks make on their loans versus what they pay on their deposits. The promise of higher interest rates suggests higher earnings for banks.
I’m not so sure that this is the whole story. I’m skeptical that significantly higher interest rates are on the horizon and are sustainable. For one thing, the SSI chart on TLT, the iShares 20+ Year Treasury Bond ETF, is still amazingly strong.
Looking at this chart I find it hard to believe that we’re about to see a collapse in bond prices and the start of a long term uptrend in interest rates. I also just don’t believe that the economy is in good enough shape to sustain higher interest rates.
As investors, however, we don’t always have the luxury of understanding why prices move the way they do. What I can tell you today is that financials are showing encouraging signs of strength … and, as Billie Holiday famously put it, “Them that’s got shall have.”
You can take that to the bank,