Banks and financials resume leadership role

Good news… 17 Banks passed the stress test, or at least the first part. The Federal Reserve released the results on Thursday and only one of the eighteen banks failed the test relative to withstanding a deep recession similar to that of 2008. The rest of the test will be released on March 14th and will take into account distribution plans for the next twelve months of dividends and stock repurchase plans. Those could produce a different outcome to the first part and it will determine if the Fed will approve future plans relative dividends and other payout plans. If the Fed disallows some of  the future plans it could be interesting as to how Wall Street and investors will respond.

On Thursday the response from investors was positive as KBE, SPDR Bank ETF broke above resistance at $26.50 and hit a new high on the day. The volume was above average and the move resulted in an acceleration of the uptrend. The news keeps the banks and financials uptrend in play for now.

In addition KRE, SPDR Regional Bank ETF established a new high as well showing further upside short term. The uptrend for the sub-sector off the November 15th low has been steady along with the recent two week test of the February high. This sector was not expected to recover with the fervor as the large money center banks due to the impact of zero percent interest rates. However, the balance sheets have improved and the percentage of loan defaults have lessened. In other words, the bottom line is looking better.

Scanning both ETFs they turned up plenty of banks that looked similar to the ETFs with solid breaks above the February highs. Some worthy of note are CIT up 3.6% and clearing resistance at $43.18, FHN gaining 3.3% and clearing resistance at the $10.86 mark, KEY pushing up 2.7% and moving above resistance at $9.57, RF up 2.2% and clearing the February high at $7.97, WFC gained 1% to add to the break made above the $35.50 level last week, and JPM up 1.2% and adding to the upside break at $49.50 on Wednesday.

There were also banks that were playing catch up as they have been in trading ranges attempting to break higher. STI, BBT, NYCB, FITB, USB, VLY and SIVB are housed in KBE, which shows more upside across the basket of stocks. These would be worth watching and trading should the upside extend and the breakouts follow through.

The regional banks (KRE) shows bigger consolidation patterns and hesitancy in the charts. The outcome of the push higher is adding up to fewer stocks moving higher and smaller percentage impressing on the move. It doesn’t mean they won’t continue to improve looking forward, and that validates the need to keep a watch list of the sector.

In addition to the bank stocks pushing higher within the financial sector, the insurance ETF, KIE broke to a new high on Tuesday. That kept the uptrend in play and scanning the ETF turns up some attractive opportunities if the follow through higher comes to fruition.

Financials (XLF) have resumed the leadership of the S&P 500 index off the February 25th low or most recent pivot point. This is a positive for the broad index overall. The Consumer Discretionary (XLY) sector is in a close second and the two will be key to leading the market higher short term.

The challenge now comes in being patient and adding to positions as they play out. Like any breakout to a new I high you have an expectation of a test. If the move can validate the upside with conviction of the buyers, i.e. volume. Look for KBE, KRE and KIE to test the fresh move higher ,and if they hold the break to the upside ,look for clear entry points that warrant the risk of taking on the positions.