Large-cap bank stocks such as Bank of America Corp (NYSE:BAC) have rallied with enthusiasm since the election results in early November. However, while that rally has extended even into November, the rate of change and the slope of the line have me questioning how high the probability of a continued run is.
The prospects of a Santa Claus rally still could offer more upside to bank stocks. But even for quicker traders, I would suggest looking out for a consolidation phase sideways to lower. That would offer better buying opportunities in BAC stock than chasing here at the highs.
For perspective, note that the financial sector of the S&P 500 — as represented by the Financial Select Sector SPDR Fund (NYSEARCA:XLF) — had rallied about 15% from Nov. 9 through last week’s highs.
Part of the reason for bank stocks’ strong outperformance in recent weeks has been the prospects of higher interest rates — not just a result of the Federal Reserve’s more hawkish tone, but also the expectations of an economic revival under a Trump presidency. Lastly, the promise of more infrastructure spending under the new presidency would also argue for more bond issuance (so, financing of infrastructure spending), which could mean more business for investment banking and capital markets businesses.
As a reminder, the Fed’s December meeting is scheduled for next week, Dec. 14. As of today, market participants are widely anticipating an interest rate hike at this meeting.
BAC Stock Charts
Before we look at BofA’s charts, I want to look at financials broadly versus the market.
Below, I plotted the S&P 500 (blue) versus the XLF ETF (red). From this multi-year perspective, we can see that this sector — after lagging badly for many years — is now just starting to play catch-up with the broader large-cap stock market.
Through a multimonth lens, bank stocks may indeed see further upside in relative and absolute terms as they try to meet the rest of the stock market.
Looking at BAC stock through a multiyear weekly lens, we see that the November breakout pushed the stock cleanly past multiyear horizontal resistance around the $18-$19 area.
While this ultimately should continue to be a bullish sign, Bank of America’s rally looks increasingly overdone from a momentum perspective, with the weekly MACD in major overbought territory.
On the daily chart, you can see that BAC stock has been trading above both its 21- and 8-day simple moving averages (yellow and blue lines, respectively) since early November. While that in itself is a strong feat, it is even more impressive if we consider the currently steep slope of these moving averages.
Bottom Line on Bank of America
If history is any guidance, then the broader stock market — and in this case also BAC stock — will take some sort of a breather into the middle part of December before possibly getting another bid into year-end.
A first better support area to buy Bank of America in my eyes is around the $20 area, followed by $19. If and when BAC stock falls to one of those levels, I would buy again upon a confirmed bullish reversal. That would be seller exhaustion followed by a strong buying day.
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