Financial stocks continue to claw their way back to their former heights … but while the Financial SPDR (NYSEARCA:XLF) sits a stone’s throw from last year’s highs, not all banks have participated in the rally.
Poor ol’ Bank of America Corp (NYSE:BAC) finds itself wandering closer and closer to bear country. But for those considering snatching up shares of BAC, listen up.
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Here are the top three reasons why you shouldn’t buy Bank of America stock.
- It’s in a downtrend. Rallies are being sold at lower and lower prices, revealing increased aggression by sellers. So long as the bears are in control, there’s no need to get trigger happy. Wait for signs the trend is reversing first.
- BAC is below all major moving averages. The BAC stock price sits not just beneath the 20- and 50-day moving averages, but also the 200-day moving average. This suggests resistance aplenty looming overhead. Until something major changes, the path of least resistance is lower.
- BofA’s relative performance has been atrocious of late. Through the back half of last year, Bank of America moved in lockstep with the broader financial sector. Consider the following chart displaying BAC stock as a blue line with the XLF as a gray area chart in the background. The relationship between BAC and XLF has decoupled over the past six weeks, with the financial sector recovering while Bank of America takes another dive into the abyss. Not surprisingly, the relative weakness of BAC stock just reached new depths.
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With Bank of America stock boasting a hat trick of bearish signs, would-be buyers should take note. With so many stronger stocks in the financial sector, why bother with BAC stock? Of the top 10 holdings in the popular financial sector fund XLF, BofA is undoubtedly one of the worst.
If you’re intent on playing with financials, consider those leading the pack such as Wells Fargo & Co (NYSE:WFC). I recently highlighted WFC stock’s attractive qualities here.
At a minimum, consider waiting to jump into BAC stock until better price action emerges. The bears are in complete control right now. I suggest watching for a decisive break above the 50-day moving average to signal an uptrend is emerging.
Those looking to profit from continued downside in BAC could buy May $16 puts for 62 cents. The risk is limited to the initial cost. The puts could theoretically yield up to $15.40 at expiration should BAC somehow go to zero.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
