Bank stocks ripped into the holiday weekend, and the sector’s strong overall performance has me eyeing bullish trades for the New Year. Both financials and energy helped boost small-caps for the past two months. But while oil stocks have begun to slip, banks are staying strong.
The divergence is telling me that if you’re seeking to profit from a continuation in the small-cap resurrection, or at least in the two sectors that best aided the recent recovery, then financials are the way to go.
One other shot in the arm for the industry that should continue to pay dividends into 2021 is the Dec. 18th Federal Reserve announcement to allow banks to resume share buybacks. Overall, there’s no shortage of tickers to choose from if you’re shopping in the sector. But here are three sterling setups that deserve your attention:
Now, let’s take a closer look at the price action. Then, I’ll share my favorite options strategy for playing.
Bank Stocks to Buy for the New Year: Financial Sector (XLF)
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Is it cheating if I start with an ETF that allows you to buy every major bank? I certainly don’t think so. What better way to play a sector’s re-emergence than to buy the whole enchilada? XLF is the Street’s most liquid fund for getting exposure to all the country’s biggest banks.
Ever since November’s Pfizer (NYSE:PFE) vaccine news gave a shot in the arm to the sector, we’ve seen nothing but constructive price action. I count one, maybe two distribution days along the way. The recent upside breakout signaled higher prices are in the offing. It’s also worth noting that we’ve seen enough upside appreciation to turn the 200-day moving average higher finally.
The low implied volatility is creating a tasty return on investment for bull call diagonal spreads.
The Trade: Buy the March $28 call while selling the Feb. $31 call for a net debit around $1.83.
JPMorgan (JPM)
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Correlations have been running high between XLF and the big bank stocks. Don’t find it surprising, then, that JPM stock looks virtually identical to XLF. That fateful day on Nov. 6 made all the difference on the chart, and it’s been a steady upward ascent ever since. The 20-day, 50-day and 200-day moving averages are all marching higher in support of buyers.
There isn’t much overhead resistance until $132, so we have room to rise further before supply comes into play. Like XLF, JPM stock options are also cheap, with an implied volatility rank of 15%. Rather than aggressive directional play like long calls or call verticals, I’m once again sticking with a diagonal spread. That way, we’ll profit even if JPM stock doesn’t shoot to the moon.
The Trade: Buy the March $125 call and sell the Feb. $135 call for around $5.30.
Bank Stocks to Buy for the New Year: Bank of America (BAC)
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The final of our bank stocks to buy is Bank of America. Its share price has followed JPMorgan, though it hasn’t regained as much lost ground. Regardless, I think the positive turn in sentiment surrounding the industry will boost BAC stock like all the others. If you favor relative strength, then stick with JPM stock.
But, if lower-priced stocks are your game, then BAC stock is worth a look. The trend is up, and all major moving averages are rising. The past week has seen a high base breakout pattern form.
You could trigger in now, or wait for a break of Friday’s high to confirm. Either way, bull call diagonals are once again my preferred play. They strike a good balance between the probability of profit and potential profit.
The Trade: Buy the March $29 call while selling the Feb. $32 call for an overall cost of around $1.73.
On the date of publication, Tyler Craig held a LONG position in XLF and PFE.
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