Don’t let the S&P 500’s stickiness at record highs fool you. There is a great deal of drama transpiring beneath the surface. The pain has been particularly acute in cyclical stocks like financials, industrials, and basic materials. But if there’s one theme that seems to be most interesting to me, it’s the dramatic rollover in bond yields which has bank stocks on the ropes.
Despite the steady drumbeat of warnings surrounding above-average inflation, bond buyers remain unmoved. Their insatiable appetite for Uncle Sam’s booming debt issuance has driven the 10-year yield down to 1.3% – a four-month low.
While the quick slip in rates provides fresh oxygen to growth stocks, it’s suffocating banks that rely on higher long-term rates to boost their profitability.
How long the headwind persists remains to be seen, but the backdrop for the financial sector is challenging for now. If you’re willing to bet on bears continuing to pull banks lower, then here are three tempting targets:
After a quick look at each price chart, I’ll share an options trade you can use.
Bank Stocks Suffering from the Rates Rout: Citigroup (C)
Citigroup is currently 15% off its 2021 peak. Prices are submerged beneath a falling 50-day and 20-day moving average, with this week’s decline returning C stock to old support near $67.50. The rejection of its recent bounce attempt reinforced the downtrend. The volume patterns have been weighing heavily in favor of sellers as well. Distribution days have multiplied, with Tuesday being the latest.
The next earnings announcement arrives on July 14 and could spark buyers’ return, but I wouldn’t hold your breath. Quarterly reports don’t typically bring excitement to bank stocks.
If you think the weakness continues and a push to $65 is in the cards, then consider buying the following put spread.
The Trade: Buy the August $67.50/$65 bear put for $1.
The risk is $1, and the potential reward is $1.50.
The correlation between today’s three picks is high, so I fully expect them to behave similarly. Metlife’s trajectory is mirroring, so you can apply Citigroup’s analysis to MET stock. The support zone that makes the most sense to build a trade around is $58. We’ve tested it multiple times as support over the past few months. If it holds, then abandon your bearish aspirations. But if it fails – watch out below.
To plan on the latter eventuality, I once again like put spreads. The probability of profit is superior to long puts, and it hedges our time decay exposure. I’m going to go a little more conservative and use September options to give MET more time to make its move.
The Trade: Buy the September $60/$55 bear put for around $2.15.
The risk is $2.15, and the potential reward is $2.85.
Bank Stocks Suffering from the Rates Rout: AIG (AIG)
The rollover in AIG is slightly further along than its predecessors. Both MET and C held their prior pivot lows. AIG did not. Tuesday’s high volume selloff took prices lower than previous support. That’s at least one argument that makes AIG more tempting for bears. The next two downside targets are $45 and $42.
Since we built vertical spreads on the other two bank stocks, let’s focus on a diagonal spread for this one. Though the payout is smaller, the higher probability of profit more than makes up for it.
The Trade: Buy the September $50 put while selling the August $45 put for a net debit of $3.35.
The risk is $3.35, and the potential reward is $1.50.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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