There is a ‘massive tectonic shift’ in the banks right now: Strategist

As the financial sector rallies in the wake of the Trump victory, banks appear to be touching their most overbought levels in nearly three decades.

Financials, up 11 percent over the last week and the top-performing sector in the S&P 500, is trading four standard deviations above its 50-day moving average, according to Bespoke financial group.

Translation: The sector's 50-day moving average is 326.89 and its close on Monday was 12 percent above that, at 367.65. That wide a gap may indicate to analysts increased risk, or that the space is too crowded.

"What we think has happened here in this space is there's a giant buying of all that risk we sold off during the unusual nine-day run there, when we saw everybody trying to get away from risk assets ahead of the election," 55 Capital strategist Max Wolff said Monday on CNBC's "Trading Nation." He said this indicates that people may "have decided the worst is behind us. We hope it's true."

But the risk in the market following Election Day hasn't even begun to make itself apparent, Wolff said. He said the risk lies not in the "wedding" of Election Day, but rather in the "marriage" of Donald Trump's presidency, over the next four years.

And while the expected less intensely regulated environment will be good for the banks, Wolff said, less regulation "usually means even less consumer confidence, and even though it's hard to imagine the public having less love for the banks, we're afraid less regulation might bring that — because a lot of folks did vote for the president-elect Donald Trump in part because they felt like Hillary Clinton was too close to the financial institutions."

And of course, many believe this is not only a story about a shift in sentiment about a repeal of the Dodd-Frank Act. It's also seen as part of the sell-off in the bond market and rising rates over the last week.

"We've been talking ad infinitum about the fact of the steepening yield curve, and now we're starting to see that happen," Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management, said Monday on CNBC's "Trading Nation."

Bond prices move inversely with their yields; the US 10-year note yield on Monday hit its highest level since last December.

"So there's no doubt this is going to be much more profitable for the banks going forward," Schlossberg said. "Also, whenever somebody says to me something is at a 30-year overbought condition, my first instinct is not to fade the move, but actually buy the dip because that means we are in a breakout territory."

"That means there is a seminal tectonic massive shift here, and I think the banks are going to be a 'buy-the-dip' buy for quite a long time," he said. In addition, he said, the expected Federal Reserve interest rate hike next month would benefit banks.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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