A tsunami of rotation slammed into the stock market this week. The wave of overnight wealth boosted value stocks and underperforming sectors to the moon. The financial sector rallied 8% overnight, buoying banks across the land. To capitalize on the newfound strength, we’re looking for the best bank stocks to buy.
Looking closer into the rotation reveals an incredible tale of two markets. In the past two days, the Russell 2000 (which claims the financial sector as one of its largest holdings) has gained 5.5%. At the same time, the tech-heavy Nasdaq lost nearly 4%. That’s a vast, gaping discrepancy and speaks to just how excited investors are to finally chase the stocks that have underperformed during the pandemic now that it’s apparent we have an extremely effective vaccine to fight the novel coronavirus.
There was no small number of attractive bank stocks to buy, but here are my favorite three picks:
After inspecting each chart, I’ll suggest my preferred options strategy to trade.
Bank Stocks to Buy: Financial Sector (XLF)
I’m a sucker for using exchange-traded funds to play sector themes. It sidesteps the messy question of picking winners from losers and allows us to bet on an entire basket instead. XLF is the Street’s go-to proxy for the financial sector and carries the biggest players in the industry among its top holdings.
Monday’s launch was as epic as it was immediate. XLF launched to a fresh eight-month high, officially reclaiming levels last seen in February. With prices now departing the lackluster range that was in place, the chase is on. As the reopening economy theme takes root in the market zeitgeist, I suspect “fear of missing out” will keep a bid under XLF.
Given the large move already established, I wouldn’t be surprised to see some backing and filling over the coming days. That, coupled with XLF’s low implied volatility, makes bull call diagonal spreads a smart way to go.
The Trade: Buy the March $25 call, while selling the Dec $28 call for a net debit around $2.30.
JPMorgan scored one of the biggest daily gains of the sector with Monday’s 9% rip. Like XLF, it carried the banking giant to a new eight-month high. It’s now above all major moving averages and is testing resistance at the $120 level. If it can chew through any overhead supply remaining in this zone, then there isn’t much to get in the way of a continued run until $130.
The past two days have seen slight profit-taking. It’s well-deserved and will help deliver a better setup for those hesitant to chase here. Regardless of whether a retracement or simple sideways consolidation forms, the next bull pattern is a buy.
The implied volatility rank is 16%, suggesting premiums are cheap and long options plays are the easy call here. Like XLF, I’m going with a bull call diagonal spread play.
To amp up the leverage by reducing the trade cost, however, I’m buying Jan as the long option instead of May.
The Trade: Buy the Jan $110 call and sell the Dec $120 call.
Mastercard rounds out today’s hat trick of bank stocks to buy. This week’s pole vault rescued the credit card provider from a nasty breakdown that slammed its share price following earnings. With the launch, its price has come full circle, returning to its pre-earnings heights. In doing so, it placed MA stock back on top of all its major moving averages, officially giving bulls the upper hand once more.
The current pullback forming is well justified after such a rapid and extended rise. It’s allowing the stock to work-off overbought pressures and build a lower-risk entry for spectators. I’m watching to see if we fill Monday’s gap or if buyers step up quicker. In either case, this dip provides an opportunity to deploy bullish plays.
If you want confirmation that the next upswing has begun, watch for a break of the prior day’s high. The higher price tag of MA stock has me favoring vertical spreads. Bull puts offer a high probability of profit.
The Trade: Sell the Dec $295/$290 bull put for 60 cents.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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