With the Federal Reserve aggressively raising interest rates to combat inflation, banks are supposed to be one of the primary beneficiaries of rising rates. Banks get to borrow money on the cheap and loan it out at crazy rates, making the spread between their borrowing costs and loan rates charges.
The three main ways banks make money are mortgages, loans (commercial, auto…) and credit cards. If you think about credit cards, some rates can exceed 20% while banks borrow money closer to the 10-year treasury of 2.78%.
The higher the Fed pushes up interest rates, the more banks can charge, which is supposed to translate to higher profits. With that in mind, let’s take a look at SPDR S&P Bank ETF (KBE). The ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P® Banks Select Industry Index.
Some of the names included in the portfolio include Citibank, Rocket Mortgages, Texas Capital Bancshares, and PennyMac Financial Services to name a few.
Not surprisingly, KBE shares are on the march higher, as is the overall market. The ETF recently moved from below to above a descending trendline that acted as a lid on price for most of 2022. Additionally, KBE managed to get to the plus side of its 50-day moving average of $45.77.
Going forward, the upside story shows sticky technical resistance at $49ish and the 200-day benchmark of $51.62, which looks like the most logical destination in the intermediate term. On the downside, the descending trendline and the 50-day mark essentially overlap should create stiff support. A close below $45 is where we’d consider cutting losses.
Day/Swing trading is risky and only appropriate for the most aggressive investors who can afford to lose discretionary money only. Do not trade money needed for day-to-day living.