Don’t Chase Bank of America Corp (BAC) Stock, But Embrace It

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The stock market has enjoyed a relentless rally since the U.S. presidential election. But if we look a little closer under the hood, we can see that the rally primarily is being driven by a few select sectors, the financial sector being one of them. Bank of America Corp (NYSE:BAC) has rallied nearly 20% last Wednesday, and most bank stocks have seen similar moves. But while you should respect the rally in BAC stock and other financials, it’s also unlikely to sustain at this rate.

beatthebellOne of my primary objectives is to give you perspective on the financial markets and individual sectors and stocks. Looking at the nearly 2% rally in the S&P 500 since last Wednesday, the primary participants were industrials (especially transports) and financials. Notable laggards were energy, technology, utilities and consumer staples. While the rally can continue for a while, it must soon start to broaden, or it risks faltering or stalling.

Indeed, this latest stock market rally has been a story of sector rotation, which at the margin is a healthy thing.

So, why has Bank of America stock and other financials — represented by the Financial Select Sector SPDR Fund (NYSEARCA:XLF) — rallied so much (11%) since last week?

For one, it’s believed that a Trump administration, complete with an accommodating Congress, will tamp down on many financial regulations that crimp banks’ profits. But also, a primary driver of the rally has been the promise of more infrastructure spending. More infrastructure spending not only could mean more economic growth, but also likely a good amount of bond issuance so as to finance this spending.

More bond supply puts downward pressure on price, but upward pressure on interest rates. Higher interest rates at the margin is a positive for banking stocks.

Also, higher bond issuance could mean more trading and new issuance business for investment banking arms of large banks, which would be a boon to BAC stock.

BAC Stock Charts

Looking at the multiyear chart of Bank of America, we clearly see that the stock has struggled to overcome horizontal resistance around the $18 mark since the initial reflex rally off the 2009 lows. The price action over the past few trading sessions has led to a clear breakout, which is also confirmed by an expansion higher in momentum.

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Ultimately, breakouts such as these — through this longer-term time-frame — have a strong tendency to ultimately retrace back to the breakout point (in this case, the $18 area) before resuming higher again.

From this perspective, don’t chase BAC stock at this point. Rather, buy it during consolidation phases.

On the daily chart, we see that the explosive rally of the past few days has BofA’s MACD momentum oscillator at the bottom of the chart at levels last seen in 2011. This alone doesn’t mean you need to short or even sell Bank of America. But it likely does mean that the recent climb’s rate of change is not sustainable.

Also note that BAC stock is now notably stretched above its 8- and 21-day simple moving averages (blue and yellow lines, respectively), which I use as a trusty gauge for near-term overbought/oversold readings. From here, traders that were quick enough to buy Bank of America shares in recent days would be wise to take some profits off the table.

That’s just prudent risk management.

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There are two unfilled gaps lower that could be used as next downside targets (spots to watch for better risk-reward buying opportunities). The first level is around $19, followed by about $18. Active investors and traders should look for those levels to possibly develop better bullish reversals again.

I like the breakout rally in BAC stock from the past week, but the rate of change is likely not sustainable. Buy the dips.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/11/bank-of-america-corp-bac-stock-dont-chase-iplace/.

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