The banks are a tough pitch right now and sadly, that goes for Bank of America (NYSE:BAC) too. BAC stock is getting crushed, as it simply has too many headwinds working against it.
Granted, the overall market is wavering as well. The S&P 500 is down about 9.5% from highs earlier this month. The Nasdaq is below last month’s low, signaling a potential rotation lower moving forward as head into Q4.
So it’s not as if BofA is alone in its recent decline. However, one could easily argue that the stock has been disappointing. Its rebound ran out of steam months ago, while shares are now starting to crack lower. The fundamentals aren’t necessarily bad, but the U.S. and global economy just doesn’t put the company in a good place right now.
Too Many Headwinds
The banks are a tough space for me. On the one hand, I recognize that there is value. The valuations are incredibly low and the dividend yields are attractive. That has to count for something and it does. Investors buying now have to do so with the realization that things can (and likely will) get worse before they get better.
Admittedly, the economic recovery has been better than expected thus far. After shutting down many parts of the economy in late Q1 and early Q2, we’ve seen a robust rebound as consumers eagerly get back to regular life. Or at least, as close to regular life as possible.
While e-commerce sales are strong and housing remains robust, it’s hard to say that the economy is back in full swing. Unemployment is up and many small businesses are struggling to get by. Talk to a local restaurant owner and see how business is going.
The banks are tied to the economy and if we can’t get the economy back to full strength, the banks face this as a headwind. Another round of stimulus will help but likely won’t be more than a Band-Aid to the underlying problem.
Recent commentary from the Fed wasn’t encouraging for two reasons. First, it wasn’t all that optimistic about the recovery. The stock market seems pretty optimistic. The real economy? Not as much.
Second, the Fed all but locked in the fact that we’ll be in a near-zero interest rate environment for several years. That’s a negative for banks, which use interest-rate spreads to make money.
Banks are not doomed with low rates, but when combined with a less-than-perfect economy, they could certainly struggle vs. the broader market.
Trading BAC Stock
The fact of the matter is, even though the broader market is stumbling, the bank stocks don’t have the type of rebound under their belt to peacefully enjoy a pullback.
Simply put, BAC stock is still 33% below its 2020 high. At its post-coronavirus high, shares were still 17.6% off the highs. Compared to the broader that made new all-time highs, this is simply unimpressive.
The writing has sort of been on the wall here with BofA. Notice the way the 200-day moving average had been acting as resistance since its big rally in June. Notice the way shares broke below uptrend support (blue line) earlier this month, then failed to reclaim it.
That again, came as the bank and its sector lagged the overall market. One could argue that BAC stock was holding the 20-day and 50-day moving average despite the other negative observations above. That is true. But taken in the perspective that this stock had more negatives than positives — multiple headwinds, lagging the market, no new highs, hitting resistance — it simply wasn’t a worthwhile long.
Now breaking down, investors need to be careful.
On a rebound, we need to see shares reclaim the 20-day and 50-day moving averages. Be cautious on a rally up to these marks if they act as resistance. For now, shares are trying to put in a short-term bottom near $23. Below opens up a test of the July low near $22 and the 23.6% retracement at $21.77.
Below those marks and who knows, maybe BAC stock tests $20.
The Bottom Line on Bank of America
While I do like BofA and JPMorgan long term, the biggest issue comes down to catalysts. Simply put, they banks lack catalysts and without a reason to drive demand, all we’re left with is supply.
That’s going to act as an overhang on the banks until there is a reason to buy. That said, BAC stock maintained its dividend through the turmoil and pays out a 3.1% yield and has a dirt cheap valuation. There are worse places to make a long-term speculation.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.