Financial stocks including Bank of America Corp (NYSE:BAC) are rallying big-league in premarket trade Thursday following news that every major bank passed the Federal Reserve’s annual stress test. With banks now confident in their cash positions, they’ve decided to divvy up the dough to shareholders in the form of dividend increases and share buybacks. Today, I want to zero in on BAC stock specifically.
Should the post-market gains hold (which I suspect they will), bank stocks from BofA to Citigroup Inc (NYSE:C) will jump right out of the gate this morning.
So, what’s the best way to capitalize on this newfound strength in BAC stock moving forward? To set the stage, a brief review of the Financial Select Sector SPDR Fund (NYSEARCA:XLF) is in order.
Ever since the June 8 breakout, bulls have dominated the landscape — and with their return comes healthier price action.
XLF’s behavior over the past month has been textbook. High volume accompanied the early June breakout suggesting it was the real deal. The subsequent pullback transpired on lower-than-average volume. And a higher pivot low just formed which confirms the new uptrend has staying power.
Prices have risen far enough (and long enough) to turn both the 20-day and 50-day moving averages higher. And with that, order has been restored in the sector. I fully expect XLF to continue higher and retest $25.30 over the coming weeks, if not days.
It’s worth noting that Wednesday night’s news is a perfect example of how news follows price. The price of financials had already awoken. Buyers had already wrested control almost a month ago. And now, lo and behold, positive news strikes. Traders who followed price should have long since established their bullish positions for XLF, C, BAC and others and will reap the rewards today.
Bottom line: if you follow the price action of a stock or sector, you’ll almost always be in before the news strikes.
Bank of America’s Chart
The first thing that jumps out at me on Bank of America’s stock chart is the slight relative weakness versus the financial sector.
Typically, we want to go with the strongest stock in the space, not one of the mediocre ones. And, to be honest, BAC qualifies as mediocre based on its relative performance. So that’s one strike against it — or at least a reason to look to one of its peers that’s been leading like Citigroup.
BAC stock has been locked in a box between $22.20 and $24.20 for months now. As a result its 20-day and 50-day moving averages have become utterly useless due to their trend-following nature. With the stock gapping higher today, overhead resistance will be tested right off the bat. A close above $24.20 will finally, finally, signal BAC’s departure of its range.
But whether it happens today or tomorrow matters little. An upside resolution is virtually inevitable if the financial sector continues to attract inflows.
Look for BofA to retest $25.80 over the coming weeks.
How to Bet on BAC Stock
Bank of America’s cheap price tag makes it a prime candidate for put selling. And the premium available isn’t too shabby either. So if you’re willing to bet buyers keep the stock aloft through August expiration, then sell the Aug $23 put for 45 cents or better.
If the puts remain out-of-the-money, you will pocket the 45 cents. The margin requirement should be around $360 so your potential return on cost is over 10%. By selling the put you are obligated to buy shares at a cost basis of $22.55.
If you’re a willing buyer down there, then allow assignment if the put sits in-the-money at expiration. Otherwise, repurchase it to close the position.
As of this writing, Tyler Craig held bullish positions in XLF.