After lagging behind the overall market since August, bank stocks look ready to enjoy a surge of relative strength. The catalyst is all about the Federal Reserve, interest rates and stock market stability.
You see, over the summer, growing fears that the Fed was going to raise interest rates for the first time since 2006 by the end of the year — in the midst of soft economic at home and overseas — pushed down Treasury bond yields, increased stock market volatility and pressured net interest margins that banks collect in their deposit-and-lending business.
These factors are reversing now that the futures market expects no rate liftoff from the Fed until March 2016 or later. As a result, the Financials SPDR (XLF) has lifted up and over its 50-day moving average for the first time since the summer — setting the stage for nice rebound rallies in its component bank stocks.
Here are five such bank stocks to keep an eye on in coming weeks:
Bank Stocks to Watch: Bank of America (BAC)
Bank of America (BAC) shares are pressing up against overhead resistance at their 200-day moving average again, as they did in September, but positive momentum on the stochastic indicator suggests a breakout is likely.
BAC reported better-than-expected earnings of 37 cents per share last week, 4 cents ahead of estimates, on strong revenues. Lower loan losses and higher mortgage originations drove the results.
Edge Pro subscribers are already enjoying a 23% gain in their Nov $16 BAC calls.
Bank Stocks to Watch: Citigroup (C)
Like BAC, Citigroup (C) shares are challenging their 200-day MA once again after crossing over their 50-day moving average last week. A breakout here would end a three-month consolidation pattern that saw the stock’s January lows tested not once but twice.
Citigroup reported better-than-expected earnings last week of $1.31 per share, 3 cents ahead of estimates, on in-line revenues. Oppenheimer analysts were positive following the earnings release, noting the steady performance of the bank’s core businesses will erode the deep well of skepticism and cynicism investors built up during the financial crisis. This is reflected in the fact C stock trades at 84% of its tangible book value.
Edge Pro subscribers are enjoying a 14% gain in their Nov $52.50 calls.
Bank Stocks to Watch: JPMorgan Chase (JPM)
JPMorgan Chase (JPM) is a more conservative holding than C or BAC, but is demonstrating a similar pattern: a three-month consolidation that looks set to end as shares press over their 50-day and 200-day moving averages.
FBR analysts remain bullish on the stock following relatively subdued Q3 earnings, with in-line earnings and soft revenues, believing it has capitalized on expense cuts and will continue to grow its loan book at a healthy rate in a challenging environment as well as continuing to enjoy a diverse fee income business.
Bank Stocks to Watch: Wells Fargo (WFC)
Wells Fargo (WFC) is a little behind the other names here, crossing over its 50-day moving average on Tuesday and remaining a little below its 200-day MA. But positive sector momentum should boost the stock as well — setting up a possible test of the July high, which would be worth a 9%-plus gain from current levels.
RBC analysts maintained their “outperform” rating after the bank reported in-line earnings driven by solid loan growth, expense control and good equity market gains.
Bank Stocks to Watch: Regions Financial (RF)
Regional banks like Regions Financial (RF) have been on the move as well, as they represent purer plays on the expansion of net interest margins that’s underway currently as the Fed steps back from the idea of a 2015 interest rate hike — boosting yields and inflation expectations.
RF is the furthest behind of the five names presented here, remaining below its 50- and 200-day MAs. But it is also the most lucrative: A return to the July high would be worth a 16.5% gain from current levels.
The bank reported mixed Q3 results Tuesday morning, with earnings of 19 cents per share missing by a penny while revenues of $1.34 billion beat expectations of $1.31 billion. Loans increased 6% to $81 billion.