Financials on Monday responded positively, as expected, to the prospect of tax-reform legislation, with names like Bank of America (NYSE:BAC), Citigroup (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM) all gapping up on the open, followed by higher closes of between 2% and 3.5%.
The Financial Select Sector SPDR ETF (NYSE:XLF) surged 1.5% to close at 28, after gaining nearly 5% last week.
The weekly XLF has surged above the top of the 9-year up-channel that originated off of the March 2009 low of 4.77. It also thrust from the convergent, up-sloping 5- and 10-week moving averages, which is a strong technical signal that XLF has entered a new upleg within its longer-term, post-2009 uptrend.
Barring a sudden downside reversal that breaks and sustains beneath 26.50, XLF is poised for upside continuation toward the 29.40/70 area, which represents the upper channel boundary of the advance off of the February 2016 low at 15.86.
Target To Watch
At Monday's high of 28.20, XLF is up 78% from the Febuary 2016 low and will be up 86% if it continues higher toward the 29.40/70 next target.
To be sure, it is very late in the "recovery rally" process off of the Financial Crisis low of 4.77 in March 2009. But while the DIA, SPY and QQQ have climbed well beyond their respective prior all-time highs, XLF remains 10% off of its June 2007 all-time high at 30.98. As long as XLF remains north of 26.40/50, we can't rule out a seasonally strong, year-end run that attempts to challenge the 2007 high at 30.98.
The Tax-Reform Bump
In theory, the tax-reform legislation with its lower corporate tax rates should unleash stronger economic growth, perhaps even latent inflationary pressures that lift longer-term interest rates, which in turn will provide greater spreads for future loan creation -- all to the benefit of banking stocks and the XLF.