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Beware Bank of America Corp (BAC) Stock and the Extreme Bulls

Breaking up banks doesn't fit with President Trump's 'America First' plans, but it's a risk to BAC stock that shouldn't be ignored

Bank of America (BAC)

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There may be trouble brewing for Bank of America Corp (NYSE:BAC). In an interview with Bloomberg yesterday, President Donald Trump touched on a campaign promise to break up so-called “universal” banks — i.e., those banks with both investment and commercial banking operations, including Bank of America, JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C). And yet, BAC stock rallied on the news.

“I’m looking at that right now,” Trump told Bloomberg. “There’s some people that want to go back to the old system, right? So we’re going to look at that.” That old system is the 1930s era Glass-Steagall Act that drew a hard line between investment and commercial banking operations. The act was repealed in the 1990s.

However, despite Trump’s nod to his campaign promise, BAC stock actually rallied more than 1% on Monday. In fact, sentiment on Wall Street is that reinstating Glass-Steagall goes against Trump’s “America First” economic plans, and therefore is unlikely to come to fruition.

Once again, it’s all about expectations.

Sentiment and Outlook on Bank of America

I’ll give Wall Street investors one thing — an exact replacement of Glass-Steagall isn’t very likely. However, some lesser form of the bill could very well make its way into Congress for debate, if not onto Trump’s desk in the Oval Office, thus raising pressure on banking stocks and BofA in particular.

Judging from BAC stock’s sentiment backdrop, any form of this bull making a serious push on Capitol Hill could be a blind side for investors — as yesterday’s rally following Trump’s interview might suggest.

For instance, Thomson/First Call reports that 22 of the 31 analysts following BofA rate the shares a “buy” or better, with no “sell” ratings to be found. There is also no short interest to speak of — short sellers simply do not have Bank of America on their radar.

Even options traders are overwhelmingly bullish. Currently, the May/June put/call open interest ratio for BAC stock rests at 0.56, and drops further to just 0.53 for the June series alone. In other words, speculative traders currently hold nearly twice as many calls as puts over the next two months.

From a contrarian perspective, optimism on a strong performing stock is to be expected. Excessive optimism, however, can be a sign of a reversal in the shares.

I believe Bank of America’s rally in the face of the president’s comments on breaking up big banks could very well be a sign of excessive optimism.

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