KBE: Bank Stocks Are Roaring And It’s Likely Not Over Yet

Bank stocks are back in rally mode after the spike in Treasury yields has resulted in the group gaining 10% in just the past couple of weeks.

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Bank stocks have been suffering ever since the Treasury yield curve has been flattening since a flatter curve means skinnier net interest margins and lower profitability. Not only have yields on the long end of the curve risen about 0.25%, the curve is finally steepening. The 10Y-2Y spread is back in positive territory and the 10Y-3M spread has gone from -0.52% to -0.23%.

The severe overbought state of Treasuries meant that a pullback like this was probably inevitable but it's still a little surprising to see it happen so swiftly. The RSI on the iShares 20+ Year Treasury Bond ETF (TLT) hit the mid-70s during the rally, a level it has hit only three times in the past decade on the weekly chart. In each of those cases, Treasury prices plunged in the aftermath of breaching the 70 level. In 2011, TLT dropped 8%. In 2015, it dropped 10%. In 2016, it fell more than 18%. TLT is currently down 4-5% from its highs. If history is any guide, long-dated Treasuries could be looking at significantly more downside.

That's great news for banks who would be more than happy to see some wider margins in their future. Looking at the chart, the SPDR S&P Bank ETF (KBE) is nearing a trendline that's been a year and a half in the making.

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KBE has hit this trendline four times in the past and has failed to breakthrough each time. The current rally has been impressive in its scope but if it can break through that trendline I think it can get back to its summer 2018 high in the $48-49 range. That would imply an upside of about 10% from here.

Disclosure: None. 

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