Market volatility has returned in a big way to Wall Street this week, with the Dow Jones Industrial Average falling back below its 50-day moving average on Friday for the first time since early October. On a technical basis, the MACD indicator has flashed a sell signal for the first time since July.
This comes just days before a likely interest rate hike from the Federal Reserve — something that hasn’t happened in nearly a decade.
The catalyst is a slide in energy prices after OPEC held production steady at its meeting last week. Brent crude is nearing levels last seen in 2008. This is weighing on the overall market due to the impact on overall corporate earnings growth.
To be sure, this has created short-side opportunities in energy stocks like Chevron (CVX), which I recently covered. But other areas are coming under pressure as well — especially financial stocks on rate hike fears and high-yield bond market turmoil.
Originally, this news was supposed to be a good thing: Higher rates equals higher long-term bond yields and wider net interest margins for banks (the gap between deposits and loan rates).
But instead, as fears of a policy error by the Fed grow amid a slowdown in U.S. manufacturing and other concerns, this rate hike turned into a negative event. Long-term Treasury bond yields have started to fall, squeezing net interest margins, while currency, equity, and commodity market volatility increases. All will weigh on bank earnings as trading revenues are hit.
As a result, here are three big Wall Street banks that are looking ready for quick short or put option plays.
Bank Stocks to Short: Bank of America Corp (BAC)
Bank of America (BAC) shares have fallen to test their 50-day moving average as they tip into their first downtrend since August. This came after shares hit overhead resistance from its July high near $18.
A breakdown here would put the August-October lows in play — a 10% or so fall from here.
The BAC Dec $17 puts recommended to Edge Pro subscribers are up more than 64% so far.
Bank Stocks to Short: Citigroup Inc (C)
Citigroup (C) shares are looking even weaker, collapsing below their 50-day moving average as they fall out of a multimonth consolidation pattern. C also didn’t come anywhere near its July highs, potentially starting an ugly pattern of lower highs and lower lows.
Net interest margins are under pressure as panicked investors pile back into long-term Treasury bonds as a T-bond trading range going back to August is broken.
Bank Stocks to Short: Goldman Sachs (GS)
Goldman Sachs (GS) is sliding back toward its October low as expectations for trading revenue — which has been a point of concern for analysts — will be under pressure in the current quarter given weakness in commodities and bonds as well as currency market volatility. This follows weak trading revenues in the third quarter.
Back in October, Deutsche Bank justified a constructive outlook on the stock on the unlikeliness of a continuation of weak trading revenue and the seasonal strength U.S. markets typically enjoy at the end of the year. Both of these assumptions look set for disappointment.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
