The gap between the haves and have-nots is widening. And bank stocks like Wells Fargo (NYSE:WFC) find themselves on the losing side of the gulf. But the company’s pain can be your gain if you know how to play it. Let’s break down the relative weakness in financials and potential strategies for capitalizing on WFC stock.
How well you’ve performed during the market recovery has depended in large part on the sector and size of your holdings. Technology has been killing it and financials have gotten killed. Relatively speaking that is.
The same goes for market cap. Large-caps have soared while small-caps have soured. A simple way to measure the performance of one area versus another is with a chart overlay. Let’s first look at the Technology SPDR (NYSEARCA:XLK), Financial SPDR (NYSEARCA:XLF) and the S&P 500.
Examining the Yucky Financials Sector
With this week’s rally, the tech sector’s year-to-date performance has returned to unchanged, which is utterly incredible given that we’ve the novel coronavirus pandemic and skyrocketing unemployment. By comparison, the S&P 500 is down 11.45%.
But it’s financials and bank stocks that have been left in the dust. For example, XLF fell as much as 43% and is still down 30% on the year. That doesn’t bode well for trying to buy names like WFC stock.
In situations like this, it’s usually better to buy leading stocks in leading sectors than fishing for lagging stocks in lagging sectors. And, as we’ll show next, WFC stock is undoubtedly one of the weakest holdings in its sector.
But that’s also why it’s so compelling as a bear candidate. Here is the same graphic but with Wells Fargo added on (pink line).
Not only did it fall further than XLF, but it also continued plumbing the depths, hitting a new low just this week. And April was the market’s best monthly gain since 1987. If WFC doesn’t score any gains with that type of big-league buying going on in the background, then you know the Street hates it.
A Closer Look At the WFC Stock Chart
The past two months have seen a great deal of chop since Wells Fargo found buyers at $25.11 on March 23. We’ve had an earnings announcement along the way that proved powerless to lift the stock out of its malaise. Thursday marked the sixth straight down day, with the past three accompanied by heavy volume that confirms institutions are pouncing on the stock. Tack on the fact that we’re a whisker away from breaking March’s lows, and the outlook is about as bad as it gets.
What’s particularly troublesome is that all of this deterioration is taking place while the broader market is holding firm. If this is how Wells Fargo behaves on a good week in the market, then it really makes you wonder how bad it could get if we see the overall market rollover.
With WFC stock at a relatively cheap $25, I think bears have a variety of strategies at their disposal. If you don’t mind the higher capital requirement and inherent unlimited risk, you could short shares with a stop over the 20-day moving average at $28. For a cheaper, higher-octane bet, you could buy puts. The Jun $27.50 puts at $3.00 offer a good bang for your buck. I’d probably use the same stop loss at $28.
Finally, you could consider purchasing July put spreads. It’s the cheapest wager of the three and offers a leveraged payout if WFC falls to $20 by expiration. The cost, and risk, is $1.45. The potential profit is $3.55.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! As of this writing, Tyler didn’t hold positions in any of the aforementioned securities.