So now we sit and wait for Fed Chair Janet Yellen’s speech tomorrow in Jackson Hole to see if a hissy fit is in the making. Stern Agee & Leach Inc. analyst Kenneth James offers a game plan for the bank stocks to play should Yellen echo the minutes’ hawkish tone.

Banks with shorter-dated assets and earnings that are heavily dependent on loans should do well, he wrote. He highlighted the companies that fit the bill and are rated buys at Stern Agee: Comerica Inc., PrivateBancorp Inc., PNC Financial Services Group Inc., Fifth Third Bancorp and East West Bancorp Inc.

Dovish remarks from Yellen would benefit banks with longer- dated assets, less liquidity to re-invest, and above-average levels of longer-term funding, he wrote. Among them are buy- rated lenders Washington Federal Inc., Umpqua Holdings Corp., EverBank Financial Corp. and TFS Financial Corp.

Eoin Treacy's view

The S&P hit another new high today and continues to close in on the psychological 2000 level. The Nasdaq-100, which has been a persistent outperformer, took out the 4000 level earlier this week. Bond yields are low, liquidity abundant, oil prices have fallen, the Russia/Ukraine crisis has ebbed, the earnings season has been particularly ebullient, companies have been buying back stock in prodigious amounts and no one really thinks the Fed is going to raise interest rates anytime soon. How could it get any better?

In a liquidity fuelled rally, the benefit of the doubt can be given to the upside provided the liquidity continues to flow. When it is withdrawn as we last saw in 2011, assets most sensitive to leverage flows pull back, often sharply. The tapering of quantitative easing has been slower than the contraction of the deficit so the net liquidity situation has continued to improve which has contributed to the pick-up in the pace of the Nasdaq’s advance.  
If for whatever reason the Fed assumes a more hawkish tone, there will be less impetus to initiate new long positions, levered positions will be pressured and stock markets may at least consolidate their short-term overbought conditions. 

Meanwhile the S&P500 Diversified Financials Index has held a progression of higher reaction lows for more than two years and moved to a new recovery high today. A sustained move below the trend mean, currently near 445, would be required to question medium-term scope for continued higher to lateral ranging.