Bank stocks have been a tricky trade after their initial post-election run. Bank of America Corp (NYSE:BAC), for instance, still is up more than 40% over the past six months. But BAC stock has essentially tread water for the past three months, up just more than 1.5%.
Of course, all that really matters is what shares will do from here — break out, break down or just take a break.
There are a couple of driving catalysts behind the BofA rally. For starters, investors presume that Donald Trump’s presidential victory will translate to a stronger economy and fewer financial regulations.
This is a mixed bag. For instance, sub-1% first-quarter GDP growth didn’t help instill much confidence, and missed estimates decidedly. But the first quarter isn’t usually too strong when it comes to GDP, and revisions could take this number higher in the future. Additionally, Trump was in office for less than 100 days at that point, so he’ll still have more time to make an impact.
Then there’s the March jobs report, which didn’t give bulls much to cheer for, either. However, the April report saw unemployment drop to 4.4% — the lowest point in a decade — and the country added more jobs than expected.
A stronger economy will help BofA by boosting spending, borrowing and financing, but it will also impact rates. On Wednesday, the Federal Reserve chose not to raise rates (as many expected) amid said weak Q1 GDP and the lackluster March jobs report. And one of the tenets of the BAC stock bull case is that higher interest rates will boost Bank of America’s bottom line.
How to Trade Bank of America
As the economy has shown mixed results, so has BAC stock.
Previously, we had looked for BofA to hold two levels of support — the $22 level and the 100-day moving average. Given how quickly the 100-day has caught up to the price, though, this level has failed as support. However, $22 has remained a solid level of support.
BAC shares have been rangebound, trading between $22 and $24 for most of the past five months. Shares did break out in mid-February to $25.50, but by mid-March, they were back to this familiar zone.
Bullish investors can take advantage of this trading range.
BAC stock currently trades around $23.70. Should it close above $24, investors could consider buying for another breakout to the upside. (The worry, of course, is that it could fail this level and drop back into the range).
Longs should use a stop-loss of $22, which has been the extreme bottom of the recent range and also is a stronger band of support. Bank of America is nowhere near overbought, as indicated by the relative strength index (purple circle). Momentum is also coming back into favor, with a positive trending MACD (orange circle).
Bottom Line for BAC Stock
Unfortunately, the RSI and MACD indicators aren’t enough to justify a long position. For those willing to buy the stock, though, there is a favorable risk/reward setup.
If you want to enhance the income from Bank of America — shares only yield 1.3% — investors could sell covered calls when the stock is near the top of its trading range.
Fundamentally, the economy will drive Bank of America.