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These unexpected stocks could be best bet into Fed rate decision, technical analyst says

Bet on these stocks into the Fed rate decision, technician says

Wall Street has high hopes the Federal Reserve on Wednesday will cut rates for the first time in more than a decade.

One unlikely group of stocks looks to be the best bet heading into that decision, says Ari Wald, Oppenheimer's head of technical analysis.

"We think the financial sector needs to be owned in some manner just given how oversold the 10-year Treasury yield has become at this 2% support," Wald said Monday  on CNBC's "Trading Nation."

Several U.S. banks, including J.P. Morgan and Wells Fargo, have warned of the effect on profits if the Fed cut rates this month. A cut can narrow the spread between how much banks pay to borrow money and their profits from loans.

However, Wald says a reversing trend in bond yields should begin to benefit financials and other cyclical stocks again. The 10-year yield dipped below 2% earlier this month before bouncing back, a level Wald now sees as a bottom.

Gina Sanchez, CEO of Chantico Global, also disputes the common wisdom that falling rates will hurt banks. She sees a lower yield in short-term bonds and higher yield in longer-term bonds as benefiting the banks.

"There's this misguided notion that low interest rates are generally bad for banks and high interest rates are generally good for banks. And we keep trying to remind people that actually what matters is the spread between the long end and the short end," said Sanchez.

A steeper yield curve, where the long end is higher than the short end, widens lenders' profit margins. A Fed rate cut could depress the short end of the yield curve, typically bumping up the long end, and boosting a bank's bottom line.

"You have coupled with that the idea that if interest rates start to go down again, the fee side of their business, which is the other side of their revenue stream, should also experience a boost, because you're going to see more deal-making in an accommodative environment," said Sanchez.

Wald sees one major bank as the safest bet whichever way the rest of the sector responds to shifts in monetary policy.

"One name that we're bullish on is J.P. Morgan," said Wald. "The stock has come into a very important test of $119. We think if the industry comes back here you get this breakout in J.P. Morgan, but we also see less downside risk if there's more time needed — some of our indicators are telling us that J.P. Morgan should hold on better so, very attractive risk-reward."

JPMorgan has edged past the rest of the sector this month, adding nearly 4% compared with the 3% increase for the XLF financial ETF.