2,000 and Beyond

July 23, 2014 10:01 AM

The outlook for banks has been underwhelming to say the least and understandably so; there are plenty of reasons for the recent under performance:

1) Regulatory overhangs persist, just the other day Citigroup announced a $7B settlement over mortgage bonds. 

2) Trading revenue has completely dried up. JP Morgan just told us that trading revenue was down 14% Y/O/Y AND Citigroup’s was down 22%. 

3) Net interest margin, a key measure for banks profitability is the lowest it has been, ever. 

The thing is, none of this is unknown and certainly most of this is priced in. Financials are the only sector trading at less than 15x earnings. JP Morgan, Bank of America and Goldman Sachs are all trading at 10x trailing earnings and right at or even less thank book value!

XLF, State Street’s Financial sector SPDR ETF has been showing relative weakness since April. At 16% of the S&P 500 (the second largest sector weight) if this group gets moving to the upside, the SPY should move out of the sideways chop we’ve seen since the beginning of July.

I like to pay attention when beaten down, loathed names start acting better . Below are charts of JPM & C which both look like they have a lot of upside. If this shunned group can get going, the S&P 500 has a good chance of getting above 2,000 in a hurry.

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