Two major items have been weighing on the banking sector since last falls election: Fed policy and Dodd-Frank Repeal. Next week the FOMC meets for a 2-day meeting and at last view, the market gives it a 99% probability that the FOMC will raise the Fed Funds rate again. This piece is well in hand, at least as far as markets are concerned. That leaves Dodd-Frank Repeal.
Thursday was the first step in that repeal process. The House of Representatives passed the Financial Choice Act, a repeal of Dodd-Frank. The next step is for the Senate to adapt and change it to pass their own version. It is clear the President will sign this bill and then all will be able to move on. What does this mean for the banks? The chart of the Financial Sector ETF XLF tells the tale.
After the November election the ETF moved higher in anticipation of this chain of events. It entered a “Congress” pattern in early December, awaiting the change of control in both Congress and the White House. Shortly after the change of power it surged higher. It stalled as it was clear the path for the new government would not be smooth sailing right away, and then fell back into consolidation. Now that the House has passed a repeal, it is back at the top of that consolidation anticipating a break out of Congress.
Momentum shows the RSI building toward the bullish zone and the MACD turning and crossing up. A break over 24 in the ETF would be a signal that the Financial Sector is moving past this era and on to new highs.