Banking stocks have gotten decimated ever since the Federal Reserve’s rate hike in December. The KBW Nasdaq Bank Index has fallen more than 20% since mid-December to levels last seen in 2013. Bank of America Corp (NYSE:BAC) stock year-to-date has fallen almost 30% and increasingly look oversold in the near-term.
Janet Yellen’s testimony before the House Financial Services Committee today could be a trigger to a much needed and possibly sharp oversold rally in BAC stock.
Shares of Bank of America stock are currently trading at less than 60% of book value, which is to say that if the company were to go into complete liquidation, sell all its holdings including real estate and more, shareholders should in theory get not quite twice as much, but still, they would get about $22 per share, not just the $12.20 per share that BAC stock is trading at.
Irrational? Maybe. However, rather than getting into an outsize valuation argument that may or may not include monetary policy, I will simply remind you that opportunity lies in between perception and reality.
Bank of America Stock
Looking at BAC stock through the longer-term lens, we see that the selling spree since the 2015 top has since mean-reverted back to a 50% retracement of the entire rally off the 2012 reaction lows (i.e., higher lows versus the 2009 lows).
The stock is also coming into a layer of horizontal support, and with the Relative Strength Index at its lowest since 2011 is also seeing oversold readings from a momentum perspective.
This year-to-date selloff in Bank of America stock has seen a sharp increase in the implied volatility of its options, which at about 45% is now well in the 90% percentile of the 52-week range. In other words, fear in BAC is very high, and implied volatility is expensive as traders are toppling over each other to buy protection.
The other side of this, however, is that active investors are now provided with an opportunity to take the other side of this fear and sell puts or put spreads for juicy premium.
Over on the daily chart, we see that Bank of America stock earlier this week broke below another near-term support level (lower horizontal), but from a momentum perspective so far has simply made a higher low, signaling that the downside press may be nearing a pause.
Aside from a two-day period in late January, BAC stock has been trading below its blue 8-day moving average since late December, which is a historic feat and speaks to the severity of the selloff.
Bank of America stock thus increasingly looks to be oversold; active investors could look to buy some BAC stock or sell out-of-the-money puts or put spreads once the stock can get back above the $12.50 area for a move up toward $14.
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