Here’s a preview of what I’ll be discussing on Talking Numbers today around 3:30 pm EST on CNBC:
The 1 year chart of XLF shows a nice uptrend over the last year, with new highs above $16 made in September. This chart alone paints a bullish picture.
But if we step back and look at the 3 year chart, there is more reason for concern. The 3 year chart of XLF shows the potential overhead supply between 16.50 and 17.20 that makes a current long in XLF a risky proposition:
XLF is one of the few sectors that has been stagnant over the past 2 years, as QE has offers banks short-term benefits, but long-term costs, as the compression in NIM at commercial banks has shown so far this quarter (WFC and PNC cases in point). The investment banks have reported better than expected results this quarter, as mortgage-bond trading desks show nice gains from anticipating QE3 (just like they anticipated QE1 and QE2). QE offers a nice short-term boost as a result. But the real damage is done to the future earnings power of the commercial banks, which now must contend with even lower yields when their existing loans roll off. I don’t see much in the way of further gains for the sector as a whole.