Is now the time to be fearful? Some will warn, it’s a guilty as charged environment for the market. But when it comes to financial heavyweight Bank of America (NYSE:BAC), the jury is still out and trying to overturn that more bearish conviction. Let me explain the issues surrounding Bank of America stock.
Many investors can argue there’s a very large disconnect between the stock market and economy right now. And understandably so. The broad-based, large-cap S&P 500 is up nearly 40% since its historic March 23 bear market bottom despite a still very real and problematic coronavirus.
Has the market no sense of what’s right and wrong? At the same time, shares of Bank of America are up 48%.
More recently, Wall Street has seen fit to ignore polarized and sometimes violent nationwide protests in the wake of the senseless death of George Floyd. And those gains have the S&P 500 nearly wiping its hands clean of the Covid-19 driven sell-off.
Is there no justice? Maybe not. More certain, there is that other branch of the government known as the Fed that’s been so instrumental in the rally’s success.
The defiant and well-supported behavior is even more profound in Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Home Depot (NYSE:HD) and other stocks near or even making fresh highs in recent days. But the separation of Main Street versus Wall Street gets even worse. The market’s betrayal is showing up in CNN’s multi-faceted fear-and-greed indicator.
The sentiment tool analyzes extremes using options activity, safe haven and junk bond demand, market breadth, volatility and price momentum. A current reading of 62 in the indicator has just entered greed territory. It’s also a full 180-degree swing away from the pandemic’s correctly warned fearful lows.
Nevertheless, while those warnings have been duly noted, the writing isn’t on the wall for Bank of America investors.
Bank of America Stock Monthly Chart
Click to Enlarge
Despite Bank of America’s outperformance since the March low, shares remain situated in their enduring position of relative weakness versus the broader market. But right now, the opportunity for the stock to continue its rally and make more of a bullish pattern impact is growing in our estimation.
What has our interest as a buy is Bank of America’s bullish stochastics crossover as shares begin to follow through off support after two months of inside candlestick consolidation work. That’s not to say the situation is without any challenges.
Front and center, shares are now challenging the 50% retracement level of the Covid-19 sell-off. There’s also a slightly smaller and already broken uptrend dating back to 2016. That’s potentially another layer of resistance just modestly above today’s Bank of America stock price.
Still, in a world where greed has been espoused as good and today’s seemingly unthinkable bullish behavior is also at the low end of the “overenthusiastic” range, the argument for buying or continuing to hold Bank of America stock today makes sense.
The Bottom Line on BAC
My price target for Bank of America over the next several months is for shares to conservatively revisit their pre-coronavirus highs near $35. For a long-only position, without fully calling into question the integrity of the chart’s bottoming pattern, I’d argue for a line in-the-sand and stop-loss beneath an eyeballed $22.85.
Alternatively, and for like-minded investors, I’d make the case for having a great defensive team in your possession and put together a dynamic collar around a long stock position. Currently and with Bank of America shares near $26.50, the August $23 / $30 combination for ten cents of premium over shares looks about right.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article, but does maintain hedged positions in the SPDRs Financial ETF (XLF).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 options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.
