Trading Nation

This is what everybody is getting wrong about the banks

Banks face a make-or-break moment heading into earnings

Banks kick off the earnings season this week.

Industry heavyweights Citigroup, J.P. Morgan Chase and Bank of America open their books against a backdrop of a Federal Reserve possibly ready to slash rates as soon as this month.

That's nothing investors should fear for the sector, according to one market watcher.

"There's a lot of talk that this Fed dovishness could be bad for banks. That's not what matters to banks. What matters to banks is the difference between the short end and the long end" of the yield curve, Gina Sanchez, CEO of Chantico Global, said Friday on CNBC's "Trading Nation."

Bank profitability depends on their net interest margin, which measures the difference between how much they pay to borrow short-term loans and how much they charge in interest for long-term loans. A steeper yield curve, which compares short-term to long-term yields, allows banks to borrow more cheaply and lend at higher rates of interest.

The spread between the 10-year Treasury note and 2-year has widened after closing in on an inversion earlier this year.

"Banks make a lot of money in [a steep yield curve] environment, and so I actually think that that is not a well understood storyline and everybody who says that a dovish Fed is bad for banks has got the wrong end of the stick. It's the spread, and that spread is remaining high, and I think that's good for banks," said Sanchez.

Financials have also broken out above a key level, which could signal more highs ahead, says Bill Baruch, president of Blue Line Futures.

"Coming out of that weekend when President Trump and President Xi met [in June], we saw asset prices roar higher and the XLF broke out above a trend line dating back to 2018. I'm looking at that trend line as now support," said Baruch.

After lagging the S&P 500 for most of the year, the XLF financials ETF has broken out over the last month. The XLF, whose stocks include J.P. Morgan and Bank of America, has gained 4% in the past four weeks and kept pace with the broader market gains.

"You've got this strong technical momentum out above that trend line so … I'm bullish out above that trend line. Out above $27, $27.50, I like being long the XLF," said Baruch.

The XLF ETF broke back above $27 in early June and has accelerated above $28 this month. The ETF is now at the highs of the year.