Banks Love the “Bernanke Put”
You’ve often heard the media refer to the “Draghi put” or the “Bernanke put.” A put offers protection. It limits your downside risk.
Well not only has ECB’s Draghi offered support for the European market, but now Bernanke has done the same by instituting the buying of $40 billion of Mortgage Backed Securities (MBS).
This is good news for those that can benefit from low mortgage rates by refinancing their present home. It also helps out new homebuyers because their payment would be smaller than before, and it gives them extra money to put to work elsewhere in the economy. It also allows those that want to buy “more house” by trading up to be able to do so with more ease than before.
All of this will generate a lot of activity for banks’ mortgage departments. But, aside from all of these points, you can bet your bottom dollar that one thing the Federal Reserve is doing here is looking out for the banks.
The market is beginning to realize this as well. As an example of this, let’s look at the weekly chart of Wells Fargo going back three years.
You can see for the last several years, WFC has gone virtually nowhere. It’s bounced in a wide range between roughly $22 a share and $33-$34 a share. However, that all changed after the FOMC meeting.
Investors now feel “very comfortable” for the first time in years about investing in bank stocks. As a result, WFC broke out of this three-year range and is beginning to head higher. Check it out below.
The “Bank Party” is Just Getting Started
Typically, when a range breaks out, the asset will move quickly. Formerly it moped around, but now it will likely jet upward.
How high could it go? Normally, an asset will move at least as much as the width of its former range. Its former range was roughly $11 a share. So, you add $11 to the point of breakout, which is around $34 and you get $45 per share.
Therefore, this “bank party” is just getting started, and it’s got quite a bit more to go. And typically, when the financials perform nicely, the rest of the market tends to head higher right along with it.
This gives yet another green light to the overall stock market to head higher.
Have a nice day!
Editor, Currency Cross Trader