While the Dow Jones Industrial Average continues to flirt with the 18,000 level, as large-cap stocks push to levels not seen since November, signs of vulnerability are developing.
The catalyst for the stock-market rally of the past week was a disappointing payroll report last Friday, casting doubt both on the health of the job market and the odds of a Federal Reserve interest rate hike this summer.
While the specter of lower interest rates for longer is good for stocks overall, it has been bad news for big bank stocks. Why? Because it threatens to pinch profitability at a time when loan growth is already slowing. Higher interest rates are a good thing for banks since they increase the gap between short- and long-term interest rates — something known as the “net interest margin” that directly impacts earnings.
With rate hike odds falling, long-term interest rates have dropped and pulled down big bank stocks in sympathy. Here are five such stocks to avoid right now:
Big Bank Stocks at Risk: Bank of America (BAC)
Bank of America Corp (BAC) shares were off about 2% on Thursday and are once again testing support below their 50-day moving average — the third such test since bottoming back in February — after bonking on resistance at their 200-day MA in April and again in late May/early June. A breakdown here would put the entire five-month uptrend at risk.
Massive resistance lies overhead near $17, marking a trading range going all the way back to 2013.
BAC will next report results on July 18 before the bell. Analysts are looking for earnings of 37 cents per share on revenues of $21.1 billion.
Big Bank Stocks at Risk: Citigroup (C)
Technically, the action in Citigroup Inc (C) shares mimics what’s happening with BAC: the testing of uptrend support after being turned away from resistance near its 200-day moving average.
In Citigroup’s case, C shares hit that line a few days ago at the same time it hit prices around $47, which previously was met in May, and before that, not since early January.
A drop to the $42-per-share level would be troublesome and potentially open up a selloff back into the $30s.
Citigroup will next report results on July 15 before the bell. Analysts are looking for earnings of $1.20 per share on revenues of $17.9 billion.
Big Bank Stocks at Risk: Goldman Sachs (GS)
Shares of Goldman Sachs Group Inc (GS) have been hit even harder, already violating the post-February uptrend support.
The stock is vulnerable to a test of the early April low near $150, the loss of which would open up the mid-February low near $140.
The company will report results on July 19 before the bell. Analysts are looking for earnings of $3.21 per share on revenues of $7.7 billion.
Big Bank Stocks at Risk: Wells Fargo (WFC)
Wells Fargo & Co (WFC) shares dropped nearly 2% on Thursday to test support near their 50-day moving average after being turned away from support at its 200-day moving average — though unlike most of the rest of the stocks on this list, WFC at least managed to battle above the line for a few days before finally being resisted.
The company’s investor day in late May confirmed short-term profitability concerns amid ongoing energy-sector defaults.
The company will next report results on July 15 before the bell. Analysts are looking for earnings of $1.01 per share on revenues of $22.2 billion.
Big Bank Stocks at Risk: Morgan Stanley (MS)
Morgan Stanley (MS) shares are falling into a new downtrend as the stochastic indicator breaks a pattern of higher lows going back to February.
If support at $26 doesn’t hold, watch for a drop to the early April low near $23.50.
The company will next report results on July 18 before the bell. Analysts are looking for earnings of 62 cents per share on revenues of $8.4 billion.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
