The Federal Reserve announced its intentions to raise interest rates earlier this month. The concept of higher rates has boosted a number of bank stocks and since the election, the group has done quite well. However, over the last few weeks, these stocks have taken a hit.
This weakness is an opportunity for investors who want to get long. When Donald Trump won the election, it took a number of investors by surprise. The market quickly rallied and many have been waiting for a pullback.
While issues with the American Health Care Act could accelerate that pullback, I think it may be time to start buying bank stocks now. The group has been strong, there are catalysts ahead and the valuations are compelling.
With the Fed set to continue raising rates, this will boost net interest margins for big banks. Should Trump follow through on tax cuts, this too will give the industry a boost. Throw in a more relaxed regulatory environment and banks could again boost their bottom line.
The following three stocks have great risk-to-reward setups. With a close stop-loss option and higher price targets set, these bank stocks offer compelling long opportunities.
Let’s take a look at three clear-cut bank stocks to buy.
Bank Stocks to Buy: Goldman Sachs Inc (GS)
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As you can see above, Goldman has found support on its 100-day moving average. After slowly falling over a few weeks, the stock cut through its 50-day moving average with little resistance.
However, the 100-day is holding up nicely. GS shares also have a level of support around $230 (purple line). The level served as a breakout spot in early December and held as support in February.
Buying near this level gives investors an attractive risk-to-reward setup. If support holds and the stock rallies, investors can lock in profits around the 50-day. Or, they could lock in some profits around that level and wait to see if the rally can take it back toward Goldman’s 52-week high around $255.
On the downside, if the $230-level fails as support and the 100-day gives way, investors can sell the position with very minimal losses. In this case, I would look for the stock to return to $210 (orange line). This served as a big consolidation and breakout level in November.
Bank Stocks to Buy: Bank of America Corp (BAC)
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However, from the start of 2014 through the first three quarters of 2016, the stock didn’t show a gain. It had its ups and downs, but the buy-and-hold investor didn’t have much to show for it.
That is, until the powerful, post-election breakout occurred. Shares have rocketed from roughly $16.50 in early November to more than $25 earlier this month. Even with the recent decline, BAC shares are still up ~50% over the last six months.
Like Goldman, BAC went right through its 50-day moving average. Although it never touched its 100-day average or its level of support at $22, the stock has buoyed from those levels.
This chart still looks healthy to me. While those levels may ultimately be retested in the coming days, the stock should be bought if they hold. Like Goldman, this puts investors in a favorable position.
Should Bank of America stock hold up, investors have a clear path back to the 50-day moving average and a possible retest of the highs near $25.50. If support fails to hold, there is a clear level on where to book losses with minimal damage done. If that’s the case, I would expect shares of BAC to decline toward its next level of support around $20.
Bank Stocks to Buy: Morgan Stanley (MS)
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Despite this decline, MS stock has found a strong level of support at $42 (purple line). That support was able to push the stock back above its 100-day moving average. Morgan Stanley shares have a bullish outlook should the stock stay north of these two levels.
If that’s the case, a return to the $44.50 level — the 50-day moving average — is in sight. It’s possible that a rally back to its 52-week highs near $47 could be in the cards as well.
Since MS did break below the 100-day moving average, it’s possible another down move could happen too. If that’s the case, I would expect support to come into play relatively soon. Barring a large market correction, MS should see support near $40.
Profit is never guaranteed, especially when it comes to trading stocks. However, traders need to identify enticing setups that offer compelling risk-to-reward opportunities. Morgan Stanley has showed life in recent trading sessions. Whether the health care vote nixes that move, we don’t know. But for now, MS is a buy with price targets of $44.50 and $47. Our stop is clearly marked with a close below $42.
Bret Kenwell is the manager and author of Future Blue Chips. He can be contacted on Twitter via @BretKenwell. As of this writing, Bret Kenwell held a long position in GS and BAC and may initiate a long position in MS in the coming days.
