The big news on the monetary policy front was this week’s speech by Federal Reserve Chairman Jerome Powell. Among other things, Powell outlined a significant shift to “average inflation targeting.” The gist of the new gambit is that the central bank will keep rates lower for longer and allow inflation to run hotter than the usual 2% target. Financial stocks were a big winner in response, and that has me shopping for the best ones to buy.
In the post-novel-coronavirus world, bank stocks have largely lagged. The underperformance is rational given the high unemployment rate and the specter of a double-dip recession if the Covid-19 crisis turns nasty in the fall. But just because something is reasonable doesn’t mean traders have to be pleased about it.
Over the past month, the technical posture of financial stocks has improved, and Thursday’s rally signals a continuation of their resurrection. I’ve scanned the sector and found the following three tickers to capitalize on the continued strength.
After analyzing their bullish patterns, I’ll offer up an options strategy well-suited for profits.
3 Financial Stocks to Buy: Financial Sector (XLF)
We’ll start with the low-hanging fruit. The most straightforward path for gaming financial stocks is to play the entire sector. It sidesteps the potential pitfall of selecting the one or two stocks that might underperform or completely ignore the industry rebound. But that’s not all! At $25 per share, XLF is a low-cost exchange-traded fund, and its options are extremely liquid.
On the charting front, we’re fast approaching a critical juncture. The 200-day moving average is barreling down on the stock from above. But, the 20-day and 50-day are pushing prices higher, along with the recent spurt of higher pivot lows. The apex of this triangle convergence is closing in, making it inevitable that XLF breaks one way or the other.
With the Fed at its back, I suspect the direction of the breakout will be higher, not lower.
The Trade: Buy the Oct $24 call and sell the Oct $26 call for around $1.45.
This creates a bull call diagonal spread that will profit if XLF goes sideways or higher.
JPMorgan Chase (JPM)
JPM stock has one of the better-looking charts of the big banks. Its posture is somewhat mirroring XLF, but it offers a far higher price tag, which makes for an easier time trading certain types of spreads (verticals, primarily). The pinching action in JP Morgan’s moving averages is mirroring the posture of the sector. Though to be fair, XLF’s short- and intermediate-term uptrends are on a slightly steeper trajectory.
Nonetheless, Thursday’s high-volume 3% pop did re-ignite JPM’s upswing. The 200-day moving average beckons overhead near $110, and I think the stock can get there over the coming weeks. With implied volatility depressed at the 20th percentile, long premium plays like bull call spreads are appealing.
The Trade: Buy the Oct $105/$110 bull call spread for around $1.80.
Ally Financial (ALLY)
Ally takes the cake as the best price pattern in the sector. The past three months have seen a beautiful ascending triangle pattern form that is on the cusp of an upside breakout. This week’s surge advanced the timeline of the breach, and unless the sector strength fails, I think we could see a very nice push higher.
Because of the speed of March’s descent, there isn’t much resistance to speak of once we break above the 200-day moving average. That should make it easier for the stock to work its way higher.
At $23, ALLY stock shares many of the same characteristics as XLF. As such, I’m going with a bull call diagonal suggestion.
The Trade: Buy the Oct $23 call and sell the Sep $25 call for around $2.05.
At the time of this writing, Tyler held long positions in XLF.
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