4 Ways to Play the Breakout in Bank Stocks

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Since topping in December, bank stocks have been taking a breather. Stocks in the industry have been mired in a six-month consolidation range inching downward. Investors have focused their attention elsewhere, to more exciting areas like biotech and big tech stocks.

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The reason? A rise in U.S. Treasury bonds into a high in late January — pushing down the 10-year Treasury yield to a low of 1.68% — weighed on sentiment because of the hit to net interest margins.

This is the gap between short-term and long-term interest rates. And it’s a proxy for the profitability of the financial sector, since they “pay” short-term rates on deposits and “earn” long-term rates on loans.

But now, a combination of increasing inflation expectations and better global macro data has Treasury bonds selling off and interest rates drifting higher. The anticipated start of the Federal Reserve’s policy tightening campaign in the months to come is playing a role as well.

In fact, Treasury bonds as represented by the iShares Barclays 20+ Year Treas.Bond (ETF) (NYSEARCA:TLT) is dropping out of an uptrend pattern going all the way back to late 2013 — suggesting this breakout in bank stocks could be a powerful one. Here are four ways to play it.

Financials Select Sector SPDR (NYSE:XLF)

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The quickest and easiest way to get exposure to the nascent rebound is via the Financials Select Sector SPDR (NYSEARCA:XLF), which gives exposure to a collection of financial stocks in the S&P 500 index.

As shown in the chart above, the XLF is lifting over medium-term downtrend resistance and looks set for a run at its December high — a 2% move from here. The fund pays a 2.7% dividend yield, and gross expense ratio is 0.15%.

Bank of America Corp. (NYSE:BAC)

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If you’re looking for some more excitement, Bank of America Corp. (NYSE:BAC) stock tops my list of individual bank stocks as shares challenge their 200-day moving average for the first time since March. First-quarter earnings missed slightly on weak net interest income offset by strong trading revenue, opening the door to a bounce back as yields rise.

A run at the December high would be worth a near 12% gain from here. The May $16 BAC calls recommended to Edge Pro subscribers on Friday are already up nearly 50% — with room for much more.

Citigroup Inc (NYSE:C)

mirhaydari-bank-stocks-cCitigroup Inc (NYSE:C) is set to break up and over resistance near $54 in anticipation of a run at its December high of $57 — a 5% gain from here.

On April 16, the company reported a bottom-line beat — despite a 2.3% drop in revenue — thanks to the utilization of $1.2 billion in deferred tax assets. Its North American loan business is heating up, something that should continue as Treasury bonds fall.

JPMorgan Chase (NYSE:JPM)

mirhaydari-bank-stocks-jpmJPMorgan Chase (NYSE:JPM) is further along than the other bank stocks here, already punching to new highs as it exits a long sideways channel near $60 that went all the way back to 2013.

In a recent note to clients, FBR Capital analysts noted that JPM’s Q1 results are driven by trading and investment banking results. But its mortgage business is heating up too, with originations up 7% last quarter — ahead of expectations.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.

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