Bank stocks have been on FIRE.

The KBW Bank Index ($BKX) – a basket of 24 banking companies –  gained nearly 6% just last week alone. That’s a remarkable one-week move, especially considering that the banking sector was lagging the market all through November.

Last week’s action more than made up for it. The banking sector did more than “play catch-up.” BKX busted out to a new all-time high on the move. Take a look…

The Federal Open Market Committee (FOMC) gets the credit for the recent buying interest in banking stocks. Investors expect the FOMC to raise short-term interest rates after it meets next week.

Banks tend to benefit from higher interest rates. So, traders bought bank stocks in anticipation of that event.

But if you’re chasing bank stocks higher today, then you’re making a mistake. You should have a better opportunity to buy once the FOMC announcement is out of the way.

Take another look at that chart of $BKX. The red arrows mark the two previous times this year the FOMC raised its interest rate target. Bank stocks sold off, hard, after each of those announcements.

The bank stock index fell 6% within one week following the March rate hike. It fell more than 3% within two weeks following the June decision to raise interest rates.

My point here is that the market anticipates FOMC rate hikes. Traders buy bank stocks in anticipation of a rally going into the FOMC meeting. Then, traders sell the bank stocks on the news.

Last week’s huge rally in bank stocks was largely the result of the market anticipating another interest rate increase following the FOMC meeting next week.

The “news” of an FOMC rate hike is already baked into bank stocks. Once the rate hike occurs, bank stocks are likely to sell off – just as they have following previous FOMC decisions – as traders exit their positions.

Best regards and good trading,

Jeff Clark

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