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The key level to watch in the financials ETF as it paces for its best month since 2009

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Trading Nation: The Fed and financials

Financials stocks are paying up.

With the Financial Select Sector SPDR ETF (XLF) on pace for its best month since April 2009, there's a key level investors should be watching, Craig Johnson, senior technical research analyst at Piper Sandler, told CNBC's "Trading Nation" on Wednesday.

After its 2009 comeback from the financial crisis lows, the XLF saw positive returns for four of the five following months, according to Piper Sandler.

Pointing to the XLF's chart, Johnson flagged a key level that, if broken, would likely confirm another leg higher.

"We've been in this sort of bullish triangle, we're breaking out, and from my perspective, we're setting ourselves up for potentially another leg higher if we could start to see this index move above this $29 level," he said.

The XLF fell by less than half of 1% on Friday to close at $28.47. It's up over 19% month to date, not far off the April 2009 gain of nearly 22%.

"I'm also watching interest rates," Johnson said. "Ten-year bond yields moving above 95 basis points is only going to put further power behind this move. And for me at this point in time, I'm going to watch it, and I'm waiting for that 95-basis-point move. Then I would be more bullish and look to perhaps have a much stronger opinion on the financials sector."

The 10-year Treasury yield fell to around 0.84% on Friday. Federal Reserve meeting minutes released Wednesday showed central bank officials considering additional asset purchases to help the economic recovery.

Financials stocks not only look cheap but have seen their margins squeezed "dramatically" on account of Covid-19, Gina Sanchez, the founder and CEO of Chantico Global and chief market strategist at Lido Advisors, said in the same "Trading Nation" interview.

"If you look at what happened to financials after 2008, it took them about 24 months to get back into really great profitability. So, we can see a path out of here," she said. "Although the lower-for-longer [policy] is not necessarily helpful to financials, it has mitigated the credit risk that they would have otherwise taken during the pandemic. And so, it actually makes it more likely that they'll become even more profitable afterwards."

Sanchez was also watching the yield curve, which tracks the relationship between 2-year and 10-year bond yields.

"You do actually need to get the yield curve to get a bit steeper. But the yield curve has been steepening," she said. "The yield curve is starting to reflect the end of the pandemic. So, that also sets up quite well. Remember, it's not the absolute number of where you are in interest rates. It's the difference between the short end and the long end. That's where banks make their money."

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