There’s an old Japanese proverb that says, “Fear is only as deep as the mind allows.” Fear plays an integral role in investing, but unfortunately it can also be an obstacle.
Over the last week, we’ve watched investors’ fear spike to levels not seen in four months. The volatility index (VIX) exploded 67% between last Tuesday and this Tuesday, as outside factors have investors fearing the worst.
There are concerns about a global recession. There are concerns that the Federal Reserve will hike interest rates — and there are also concerns that they won’t. The 10-year Treasury bond fell to its lowest level since 2012, and the German version of the 10-year bond, the Bund, fell into negative territory.
Then there are uncertainties surrounding the upcoming “Brexit,” in which Great Britain will decide whether or not to leave the European Union (EU).
As a result, the financial industry has been a rollercoaster ride for much of this year. The Financial Select Sector SPDR ETF (XLF) fell to start 2016, rebounded and is now down 4.6% in June alone. And many of the bank stocks have traded right in tandem.
BAC Stock Chart
More specifically, Bank of America Corp (BAC) has had a rough go of it lately. The stock climbed nearly 40% from a 52-week low in February to a near-term high in late April, breaking above its 50-day moving average (the blue line) before stalling out at the 200-day (the red line).
After failing in April, BAC pulled back to the 50-day moving average. The support held, and the shares rallied back to retest the 200-day. But once again, they failed to break above.
The stock then fell back to the 50-day average, but this time support didn’t hold. BAC fell through both the indicator and previous price support around $13.80. The stock has now been below its 50-day average for a week, which is the longest period of time it has spent below that level since March.
There’s still a bit of support at $12.75, but if BAC falls through that level, there’s nothing else until the 52-week low of $10.99.
The recent Fed meeting is what’s putting additional pressure on the financial industry right now. And with the 10-year Treasury yield so low, it has hurt a lot of the bank stocks that would benefit from higher interest rates. Unfortunately, they’re not going to get them any time soon.
There’s no question that Bank of America is selling at a steep discount right now, but I want to watch the stock a bit longer before buying in. BAC needs to hold support at $12.75, and if it does, the currently oversold relative strength index (RSI) would likely start to improve, which could trigger a near-term buy signal.
As of this writing, Matt McCall did not hold a position in any of the aforementioned securities.
