3 Bank Stocks to Buy on the Dip

bank stocks - 3 Bank Stocks to Buy on the Dip

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Bank stocks have awoken. Their share prices are ripping higher to make up for months of lost time. The buoyancy is a byproduct of several different things. But but before we dive further into things, I want to make my goal here clear: Today’s message will show you three smart ways to make money from the boom in bank stocks.

The first force driving the financial sector’s resurrection is a rotation into small-caps and value stocks. These are areas that long lagged growth stocks and the technology sector throughout 2020. November’s much-celebrated Pfizer (NYSE:PFE) novel coronavirus vaccine news sparked massive capital flows back to small-caps and areas deemed more sensitive to the economy. Bank stocks were among the beneficiaries.

A second development fueling financials’ rise is the steepening yield curve. While the Federal Reserve continues to hold short-term rates near zero, rates on the long-end have increased alongside inflation expectations. As the gap between the two widens, banks become more profitable.

Even if you knew nothing of these two reasons, the fact is the price action in nearly every chart of the sector demands taking a bullish view on banks. I’ve scoured the space for the best patterns and found the following three:

  • Financial Sector (NYSEARCA:XLF)
  • JPMorgan Chase (NYSE:JPM)
  • Bank of America (NYSE:BAC)

Let’s take a closer look at each chart and determine which options trades are worth betting on.

Bank Stocks to Buy: Financial Sector (XLF)

Financial Sector ETF (XLF) with bull retracement pattern

Source: The thinkorswim® platform from TD Ameritrade

The first and arguably easiest path to play financials is with the sector’s key exchange-traded fund. It provides exposure to all the biggest companies in the space while insulating you from the idiosyncratic risk inherent with single stock purchases. You can plainly see the post-November ramp in XLF as well as the rousing start to 2021.

Last week’s pullback was just what the doctor ordered for spectators hesitant to chase. Friday’s probe of the 20-day moving average is holding so far. This is as good a buy-the-dip setup as we’ve seen over the past quarter. Given the low implied volatility and cheap price tag, I favor bull call diagonal spreads here.

The Trade: Buy the March $29 call while selling the Feb $31.50 call for a net debit of around $1.65.

JPMorgan Chase (JPM)

JPMorgan (JPM) stock with bull retracement pattern

Source: The thinkorswim® platform from TD Ameritrade

If you search the biggest bank stocks on the Street, you’ll find none better than JPM stock. Its bull retracement pattern was made for a textbook. Take the previous upswing for instance. It was accompanied by heavy volume and powerful momentum. Comparatively, the pullback saw little participation — no major selling, no death-dealing distribution. And then, Friday’s opening gap lower was bought up right after the bell. Buyers vigorously defended the 20-day moving average.

Throw it all together, and JPM deserves the top spot among single stock picks in the sector. Its latest earnings report was rock solid as well.

The Trade: Buy the March $135/$145 bull call spread for $3.50.

Bank of America (BAC)

Bank of America (BAC) stock chart with bull retracement pattern

Source: The thinkorswim® platform from TD Ameritrade

For a lower-cost choice, but one that still boasts more volatility than the sector ETF, I suggest Bank of America. At $31.55, it opens the door to naked puts, covered calls or even a straight stock play. As far as its pattern goes, it’s moving in veritable lockstep with its sector. Bears will point out BAC stock did close below the rising 20-day moving average on Friday, but I think it’s just noise given the stellar setup of XLF and most other stocks in the sector.

Because the stock is nestled near support and resistance is far off at $34.37, there’s an attractive amount of upside if we bounce here. With a tight stop loss, you can create a compelling risk/reward trade.

The Trade: Buy the March $30 call option for approximately $2.40.

On the date of publication, Tyler Craig held a LONG position in XLF.

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