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For the past few months bank stocks have been getting hammered by the falling 10 year despite solid earnings beats and the raising of the Federal Funds rate by 25 basis points to 1-1.25. However, since the bottom of the XLF in late May @ 23, the XLF has been successfully able to hold its support and now after the stress tests results showed positive cash flows for the major banks able to withstand a recession of great magnitiude, many hiked dividends from anywhere between 3-100% while buying back tons of stock, solidifying strong confidence by management to shareholders and potential investors that their financial health is the best since pre-recession of 2008.
On a technical side, we see a breakout of the dreaded head and shoulders pattern in a bullish manner by holding the 23 support (the neckline) and busting through the head of resistance at 24.02 on high volume and strong relative strength indicating the price movement is legit and not a head fake like it was in May where the MACD crossed in a bearish manner and RSI quickly depleted indicating a roll over top.
I am bullish on XLF to 25.29 and then to 28.87 over the next 6-12 months, indicating an increase of approx. 15% on at least one more rate increase this year and potentially 3 next year pending continued job growth and rising inflation , as well as the idea of the Fed re-structuring the balance sheet and unleashing trillions of bonds and mbs onto the market from the recession of 2008, which will push the 10 year yield higher and widen the 2-10s spread further profiting the banks.
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