Stocks staged a broad-based rally on Tuesday after Federal Reserve Chairwoman Janet Yellen indicated that the pace of any interest rate hikes will be slow. Markets loved it as much as they loved similar dovish statements in recent years, and this led to significant gains for stocks.
Notably lagging the action, however, were bank stocks, which would have favored a more hawkish statement and a potential steepening in the yield curve. With important bank stocks like Bank of America Corp (NYSE:BAC) closing lower for the day in Tuesday’s otherwise broad rally, we need to see this group quickly wake up and start participating.
Otherwise, this rally is likely capped on the upside.
As I continuously indicate in this column, the importance of the financial sector to the broader U.S. stock market cannot be understated. As an important part of both the economy and for many equity indices, a drag in banking earnings and/or lack of participation on rally days by banking stocks can be telling. So on a day like Tuesday when the Russell 2000 rallied 2.7% and the S&P 500 gained 0.9%, the fact that BAC stock and other banking equities as a group closed lower means we should sit up and take notice.
Let’s look at the price charts of Bank of America to see what possible scenarios we could discern for bank stocks.
BAC Stock Charts
Looking at Bank of America stock through a multiyear lens, we see that from the first quarter of 2014 until this past January, BAC essentially has been in a bigger-picture consolidation phase. The January selling pressure snapped the stock’s horizontal area of support (blue box) around the $14.50-$15 area and led to a waterfall selloff.
By early February, BAC stock had retraced just about 50% of its entire 2011-15 rally on a weekly closing basis and began to snap back. But the rally off those lows has yet to lead to any higher highs in the near-term and still faces stiff headwinds from the former technical support area around $14.50-$15.
If we look at this same picture on the daily chart, we see that while the blue resistance zone may well act as such for BAC stock, we also can’t yet rule out a push higher into this area. Despite the underperformance on Tuesday, Bank of America continues to hold its yellow 21-day simple moving average and is still consolidating below the black diagonal resistance line.
Traders and active investors now have two areas to focus on:
- A break of BAC stock above $13.80 could get it moving to $14.50-$15
- A break below the $13 area on a daily closing basis would mean the stock is breaking its multiweek consolidation phase on the downside.
This, accompanied with equal weakness in other big banking stocks, will likely also weigh on the broader stock market.
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