Bank stocks have suffered serial underperformance during the market recovery. And, come to think of it, they also fell a lot harder during the crash. That said, both stats make it impossible to recommend buying the sector or most of its constituents right now. And with fresh selling pressure striking on Tuesday, banks may be an area worth bailing on altogether.
A quick survey of the Financial Sector SPDR (NYSEARCA:XLF) reveals a chart that never quite reclaimed the high ground after March’s massacre. Almost every other sector was able to rally back above their respective 50-day moving averages. But not XLF!
Despite multiple attempts to breach this critical level, financials were rejected every time. And now, with Tuesday’s 2.65% slide, XLF and the broad swath of banks that call it home, are a banana peel away from tumbling through the floor. It’s a stumble that will spell the death knell for its fledgling uptrend.
Overall, while there are many bank stocks worth abandoning or deploying bearish trades on, these are three of the most vulnerable:
I could have added Wells Fargo (NYSE:WFC), but I’ve already dubbed it the ugliest bank stock on the planet. So I figured there was no need to pile on. That said, let’s take a closer look at the charts and map how you can profit from their downfall.
Bank Stocks to Withdraw From: JPMorgan (JPM)
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JPMorgan has a reputation for one of the best players in the financial space. Its price chart was rocking at record highs before the novel coronavirus came to town. Unfortunately, neither its reputation nor its pristine chart has saved it from the worries plaguing banks in the post-coronavirus world.
From peak to trough, JPM stock fell 40% far outpacing the S&P 500’s slide of 34%. Its recovery since was lackluster and never topped the 50-day moving average. And with Tuesday’s rout, a breakdown is imminent. That said, I’m looking for a retest of March’s lows over the coming weeks.
Buying put spreads offers a compelling payout, and here’s the structure that interests me.
The Trade: Buy the July $85/$80 bear put spread for $2.00
The risk is limited to the $2 cost and will be lost if JPM sits above $85 at expiration. The potential reward is $3 and will be pocketed if the stock falls below $80. By risking $2 to make $3, this spread offers a 150% return on investment.
Bank of America (BAC)
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Bank of America has always been a lower-priced alternative to traders balking at the higher price tag of JPM. During the March massacre, this popular bank stock fell below $20 on its way to a 50% haircut. BAC stock’s trajectory is very similar to the sector ETF, with its twin attempts at rising above the 50-day moving average both failing miserably.
Moreover, Tuesday’s selloff already broke short-term support, and is confirmation enough that the next downswing has begun. The past two trading sessions have seen higher-than-average volume accompany the descent, which confirms institutions are abandoning ship.
We’re mixing up our trade structure a bit by building a diagonal spread. The cheaper price of BAC stock lends itself well to this strategy, and it offers a higher probability of profit than the bear put we built on JPM.
The Trade: Buy the Aug $24 put while selling the Jun $20 put for a net debit of $2.65.
Your risk is capped at $2.65. Shoot for a gain of 50 cents to $1.00.
American Express (AXP)
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American Express has lagged its counterparts — Mastercard (NYSE:MA) and Visa (NYSE:V) — over the past two months. And that makes it one of the best picks in the credit card space to build bearish trades on. Relative weakness during the rebound usually translates into bigger damage on the next drop.
The tell for me, once again, was AXP stock’s failure to breach the 50-day. While the rest of the market, and XLF, to a certain extent, have been climbing steadily higher, American Express shares have been treading water. The bearish logic is straightforward. If AXP can’t claw its way out of the abyss while the market is hot, it sure isn’t going to do it when the broad market rolls over. That’s essentially what happened on Tuesday.
The ultimate downside target is $67.
The Trade: Buy the July $80/$75 bear put spread for around $1.80.
You’re risking $1.80 to make $3.20.
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