This trade relates to a steepening of the US yield curve as rates adjust upwards through either rising or a pickup in US growth (or both) having been driven to a record low in June.
What is interesting to note from a technical perspective is that the BKX index traded within 1% of the 2007 - 2009 level last July, before bottoming at the level in February this year. Since then, yields have continued to fall (grey), but the relative performance of banks versus the S&P 500 (blue) has held firmer and failed to make new lows.
Assuming the reflation theme transpires, banks represent a compelling value play and remain an uncrowded US equity play. Now trading below the $70 level, technically the banks are in the lower half of the last 12 month's trading range and provide a decent payoff in the run up to $80 (61.8% level) with a stop-on-close (weekly) below $57 (38.2%).
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