Israel's economy will expand 3.6 percent this year compared with 1.6 percent in the U.S., according to the average forecasts of economists surveyed by Bloomberg.

The country's financial companies, which include Azrieli Group and Bank Hapoalim Ltd., the nation's biggest lender by assets, make up the cheapest industry group in the index, with a valuation of 9.4 times estimated earnings. This compares with an average 13.2 for companies in the MSCI World Finance Index.

“We like banks because they have underperformed most developed banks and will be the main beneficiaries from a pick-up in the economy,” Micha Goldberg, the head of equity research at Excellence Nessuah in Ramat Gan, said by phone on Sept. 11.

Israel's five largest bank stocks are trading at a price to book ratio of 0.75, which compares to a 1.15 ratio for the MSCI World Bank Index of developed lenders.

Israeli stocks will recover from declines sparked by military conflict, if history is any guide. While the TA-25 benchmark index sank to an eight-month low during the Second Lebanon war, which started on July 12, 2006, it ended the year close to a record. The measure climbed to a 17-month high on Dec. 11, 2012, a month after Israel began an eight-day military operation in the Gaza Strip.

Eoin Treacy's view It is little wonder that existential angst is rarely far from the front page in Israel when its neighbours are so often unstable, tend to adopt populist rhetoric and support subversive elements. However, the receding threat of a US-led military strike on Syria can be viewed as at least a short-term positive for Israel and the stock market is beginning to respond.

The Tel Aviv 100 has been ranging with a mild upward bias for more than a year and broke out to new two-year highs today. A clear downward dynamic would be required to question potential for additional upside. The Tel Aviv Banking Index has also pushed back up to test the psychological 1200 level and is being led higher by Bank Hapoalim.

It is also notable that the US Dollar encountered resistance in the region of the 200-day MA against the Israeli Shekel last week and has returned to retest the early August lows nears ILS3.50. A sustained move above ILS3.65 would be required to question the consistency of the Dollar's medium-term downtrend.

While regional security issue tends to garner media headlines, it is also worthy considering that Israel's two largest companies are in the generic pharmaceuticals sector. Perrigo and Teva Pharmaceuticals are both dual listed in Tel Aviv and the USA. Perrigo's US listing found support in August in the region of the 200-day MA and the upper side of its underlying range while Teva is an underperformer and has fallen to break its progression of higher reaction lows for the year.

Delek Group made headlines two years ago when it struck gas in the Mediterranean but has spent much of the last two years confined to a range. It posted new closing highs today and a sustained move below ILS1550 would be required to question medium-term scope for additional upside.