My indicators are flashing sell signals again, a downgrade from last week’s bullish readings. However, my overall philosophy remains unchanged: Don’t fight the Fed and don’t fight the tape.
The latest survey results from the American Association of Individual Investors show nearly 49% bears versus the historical average of about 31%. The remainder is made up of 27% with a neutral view of the market and 24% with a bullish view.
I’m somewhere in the neutral to bullish camp, and the key thing to remember, which I’ve been repeating over and over again, is that the Federal Reserve is committed to keeping asset prices elevated.
For that reason, I’m recommending a bullish position on Ally Financial Inc. (NYSE:ALLY) this morning.
Are People Too Worried About the Banks?
Earlier this week, bank stocks helped limit the market’s losses when regulators announced plans to loosen restrictions from the Volcker Rule, a regulation put in place after the Great Recession.
This will let banks make large investments much easier, and it fueled optimism in the sector.
However, last night, after the Federal Reserve’s quarterly stress test of the financial system, the central bank voted to cap bank dividends and share buybacks as a way to force banks to preserve capital.
Investors have been concerned about banks’ ability to make money with lower interest rates, and lower dividends and fewer share buybacks may amplify investors fears, but how concerned should we be about banks’ profits?
The banks will always find a way to make money. When we were all concerned the banks wouldn’t earn any money because of low interest rates at the end of 2019, ALLY managed to beat expectations for the fourth quarter.
Financial stocks have been steadily moving higher, and as long as the Fed is supporting the market, I expect them to press on.
ALLY Could Bounce Off Support
If you look at the chart below, you can see that ALLY has started to form support at around $18. The bearish news about dividends could push the stock back to that level, giving investors a chance to jump in and push the stock higher.
Daily Chart of Ally Financial Inc. (ALLY) — Chart Source: TradingView
Recently ALLY ran into resistance just above $22 and just above $24 before that. I don’t think it will get enough momentum to challenge the $24 level, but if it does hit support at $18, the stock could bounce back to $22.
That makes it an excellent strike price for a bullish call option.
Buy to open the Ally Financial Inc. (ALLY) Aug. 21st $22 Calls (ALLY200821C00022000) at $1.50 or lower.
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