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Watching the Banks for Signs of Trouble

NEW YORK ( TheStreet) -- As I opined in an article yesterday, even the treasured consumer goods sector isn't sacrosanct in today's economic climate.

The same is true for the banking stocks and the financial sector. Some meaningful headwinds like higher mortgage rates, a spike in the price of oil and the persistent rumors of a global slowdown linger on.

TheStreet's Jim Cramer commented on Wednesday about the current interest rate scenario and what may be on the horizon. His view is a temporarily disturbing one that holds true for all the big-name, dividend-paying stocks.

He wrote, "I think it says interest rates are still going higher and today's climb back up is for real. These stocks [consumer goods in particular] are all part of that bond market equivalent trade and they failed to rally when rates dipped back down the other day. This tells me that the decline in rates isn't for real and we will soon see 3% on the 10 year Treasury note, about a quarter of a point from where it is now."

Jim has a gift for saying a lot in just a few lines. If his predicative gifts are as well honed, we'd be smart to keep an eye on this situation. How will that "bond market equivalent trade" affect other sectors?

The big banks, including investment banks and the more traditional ones, could be the next canary in the coal mine. Rising interest rates can positively impact upon the sector's "carry trade" but...

Borrowing costs can really put the kibosh to the financial sector's lending business. I'm in the camp that doesn't believe the Federal Reserve is going to sit idly by and let its "children" suffer, so I remain optimistic.

If we look at the iShares Dow Jones U.S. Financial Services ETF (IYG) on a one-year basis we can see some clues concerning what may be unfolding.

The ETF has almost 33% of its weighted holdings in three banking Goliaths: Wells Fargo (WFC - Get Report), JPMorgan Chase (JPM - Get Report) and Citigroup (C - Get Report).

IYG Chart IYG data by YCharts

IYG has had a breath-taking 10-month rally from November 2012 to the peak earlier this month. The same could be said for the three largest holdings, as illustrated in the one-year chart below.

WFC Chart WFC data by YCharts
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IYG $86.21 1.00%
C $46.67 0.84%
JPM $63.79 0.93%
WFC $50.58 1.20%
AAPL $93.66 -0.09%


Chart of I:DJI
DOW 17,891.16 +117.52 0.66%
S&P 500 2,081.43 +16.13 0.78%
NASDAQ 4,817.5940 +42.2360 0.88%

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