$XLF long idea in a higher rate environment

With the Federal Reserve announcing rate hikes starting in March, financials should prosper. Higher interest rates (TNX) means that it costs more to borrow money which is a bullish sign for banks. The economy is also not showing any signs of slowing down, commodities continue to move higher and job reports signal a strong economy. This can be translated to assuming that consumer spending will not slow down; low supply on high demand shows that they will continue to spend and borrow money.

Also, if we look at Treasury Bonds (TLT), we see some serious selling even though the Federal Reserve continues to purchase. This could lead to a stronger Dollar (DXY) and a move from growth equities (ARKK, QQQ) into cash or savings accounts. During rate hikes, history shows an inflow into companies with high cash reserves, cash flow, and high dividends.

The technical side of XLF shows relative strength while indices continue to fall. On the weekly timeframe, we can see a clear bull flag pattern that has broken out and if we close above $40 today, we have confirmation. MACD shows a bullish crossover is near and RSI is healthy.

Targets are 43, 45 and 47.

OptionsSwing Analyst
Daniel Betancourt