Financial sector ETFs are rallying this week with many banks raising dividends or announcing share buybacks with the blessing of the Federal Reserve.

The question is how high can the sector ETFs run if the economy and job market continue to show signs of improvement.

Financial Select Sector SPDR (NYSEArca: XLF) rallied nearly 4% on Tuesday. Wells Fargo (NYSE: WFC) and JP Morgan (NYSE: JPM) are the two largest stock holdings, and were among the banks that announced dividend increases and share repurchases after passing the Fed’s stress tests. [Bank ETFs Juiced by Dividends, Share Buybacks]

The financial ETF has broken free of its consolidation the past five weeks to close at its best level since July 2011, said Tarquin Coe, technical analyst at Investors Intelligence.

“A cup-and-handle bottom, which built up during the second half of 2011 is confirmed and in play. That base yields a target to around $17.50 [a share], a move which is enough to breach the highs from 2010 and 2011,” he added in a newsletter Wednesday. “Hence, the fund has further to run and longs are worth considering on any near-term weakness. Only a slide back beneath $14 would invalidate the bullish potential implied by the late 2011 bottom.”

Financial Select Sector SPDR

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