An averted government shutdown had bulls cheering and financial scribes writing lame duck excuses of additional support to the so-called Donald Trump Rally to open up the trading week. But it hasn’t been an altogether level playing field. One area not fully cooperating with the gravity-defying law of the land are financial stocks Goldman Sachs Group Inc (NYSE:GS), Wells Fargo & Co (NYSE:WFC) and American International Group Inc (NYSE:AIG).
Even better, GS, WFC and AIG are finally back where they belong; behind bars on the price chart and ready for shorting!
If you couldn’t guess, I’m not exactly a fan of these financial stocks. But maybe you think the vampire squid that is Goldman, a sleazy retail banker known as Wells Fargo and AIG, one of the chief unwitting architects behind the financial crisis exploding into a house of pain for the country are somehow companies worth respecting?
I hope not, especially right now.
My advice, if you do think these financial stocks deserve pardons from past transgressions, is to go back to watching puppy dogs and rainbows on Instagram and hearting tweets from our president. Bottom-line, this article on shorting GS, WFC and AIG is not for you.
For those still with me, let’s move ahead, examine the daily price action of each of these financial stocks and locate limited-risk options strategies in lieu of a riskier short sale which won’t break your proverbial bank — or the good ol’ USA’s for that matter.
Financial Stocks to Short: Goldman Sachs (GS)
The White House’s favorite banker, Goldman Sachs, is the first financial stock on our list of shorts. Shares of GS were up Monday despite, or maybe because of, Trump more or less tweeting with Bloomberg, saying banks could be broken apart, in his typically short and opaque communication style.
But Monday’s optimistic bid aside and despite the chummy inside job positioning in Washington, as well as proposed tax legislation to help the likes of Goldman and its one-percent client base, GS stock is moving lower.
Technically and as the provided daily chart illustrates, this financial stock is no longer receiving the privileged support of the 50-day simple moving average. That’s bad news. Worse yet, the line has been overhead resistance for several weeks now, as GS trades in a bearish lower low and lower high pattern.
If there are any positives for GS, it’s that shares are still stationed above the 200-day simple moving average. But rather than blindly think this means the bulls deserve the benefit of the doubt, I see the current relative weakness as a canary in Trump’s coalmine. It has anticipated that a test of the long-term average and 50% retracement level are increasingly likely given the building bearish picture.
Reviewing Goldman Sachs’ options, the June $210/$200 bear put spread is interesting. Priced for $1 with shares at $224.85, the expiration breakeven of $209 sits a couple percent above the discussed moving average and Fibonacci support levels near $206 and would return $3 if shares finished there as the June cycle closed out.
Ideally, if this financial stock falls below $200, a return of $9, or 900%, is possible. Opportunistically and more pragmatically, if GS were to begin trading lower, I’d be watching for put premiums to expand so an adjustment into a very-low-cost or even a no-risk, positioned butterfly is possible.
Financial Stocks to Short: Wells Fargo (WFC)
Next up on our list of financial stocks to short are shares of WFC. Wells Fargo has rallied handily since late last year, when its seedy credit card practices came to light back in the first half of last September.
Pixie dust from the Trump administration, as well as optimism over higher rates generating fatter spreads for bankers, have been largely responsible for the gains in WFC stock. But now, like its fellow anchor banker Goldman, this financial stock has begun a bearish journey of lower highs and lows.
Technically, the corrective activity is similar in percentage terms to GS stock. However, traders have penalized WFC with a bit more authority in already establishing a test of the 200-day simple moving average and 50% retracement level.
Looking forward in a bearishly optimistic sort of way, I anticipate the current lower high and bearish flag pattern will result in a test of last month’s $51.26 pivot in this financial stock.
If things go really well (sorry bulls), WFC stock should trade down to or slightly below $50. That amounts to a challenge of the 62% retracement, as well as the November downtrend breakout area.
As for an options strategy on this financial stock, a bearishly-positioned long butterfly using the May $53.50/$52/$50.50 puts is conservatively priced for 25 cents with shares at $54.46.
In a perfect world WFC stock will land squarely at $52 for a retest of the 200-day SMA and 50% retracement level at expiration. If this were to occur, a profit of nearly $1.25, or return of 500%, would be possible.
Given that’s an extreme long shot and gains are slow to build with butterflies, taking profits along the way to cover risk, if presented with the opportunity, makes sense despite the low cost for entry.
Financial Stocks to Short: AIG (AIG)
Last on our list of bearish financial stock plays are shares of AIG. Of the three financial stocks, it’s AIG that I personally find the most reprehensible for its reckless behavior leading into the financial crisis.
Truthfully and despite the disdain for AIG, I could allow bygones to be bygones. It has been nearly a decade since the crisis began to unravel and this financial stock is not the same company as the one bailed out by taxpayers. But what I refuse to do is turn a blind eye to a very bearish-looking chart.
Looking at the daily AIG stock chart, over the past two-and-one-half months, shares have built up a forceful bear case. From an initial bearish gap in mid-February which broke uptrend support, AIG has established a downtrend channel that’s now hitting overhead resistance from the 50- and 200-day simple moving averages as part of bear flag pattern.
With shares at $61.61, a move to $58 would set up a fresh lower low and test of the 50% retracement level. A more forceful decline towards $55.75 would challenge the 62% level. As this financial stock is flashing an overbought stochastics condition, fading the current countertrend rally becomes even more compelling.
After examining the AIG options board, I like the June $60/$57.50 bear put spread. Priced for 65 cents, the vertical can capture its maximum profit of $1.85 if AIG can work its way roughly 1% below the 50% retracement level into the June expiration.
Lastly, this financial stock is set to release earnings on Wednesday. As such, limited- and reduced-risk verticals make even more sense as a way to position smartly.
Bottom line, bears could have very quick confirmation AIG is improving its downtrend. However, should shares receive the proverbial ‘get out of jail’ card from investors, it’s nice to know this loss is well-controlled and won’t infringe on Uncle Sam for a required bailout.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.