- JPMorgan (JPM) stock has a cream of the crop reputation in the banking sector.
- Bank of America (BAC) has support from reliable management.
- Goldman Sachs (GS) stock has support from shrewd market calls.
Last week ended on a very weak note, making investors hesitant and risk averse. The outcome of the earnings reports of mega caps like Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Meta Platforms (NASDAQ:FB) will make or break things. The direction of the earnings reactions will set the tone for the next few weeks for equities.
The indices are teetering above support levels that must hold. Losing those could accelerate the correction even further at an additional 12%. The macroeconomic conditions have not yet deteriorated, but sentiment has reached an extreme degree. The fear stems from the aggressive tone that the Federal Reserve (Fed) has adopted. The flip from dovish to hawkish turned into sheer panic over inflation.
The Fed is now calling for extreme rate hikes to insure price stability. They might be overestimating the need for hikes and will overdo things. If I am right, there is even a chance that they would need to cut rates by January. That’s about the same scenario that played out around Christmas 2018. War and slowdowns are big enough threats that the Fed ought to watch for a quarter. They may turn out to be natural quantitative tightening.
Focus on the Tactical Opportunities
Nevertheless, there are still opportunities to profit from equities in the short-term. I have chosen three bank stocks to buy for opportunities for a relief rally. All three of these stocks are falling into technical support. None of these three stocks to buy have evident intrinsic problems, so the technicals should play out. However, there is system-wide risk out of the last two weeks. Wall Street is coming into the most important week for earnings with tremendous trepidation.
I would consider these to be tactical trades, not long-term investments. The financial sector has had freebies from the Fed for a while. That gravy train has ended, so things should get a bit tougher from here.
Recently, there was concern over the inversion of the yield curve. But Tony Dwyer thinks most experts may be focusing on the wrong one. The better yield curve to watch is the three month mark for the five year bond yields. It better represents the lending environment, which suggests that banks can still lend profitably.
This week, we will also find out how the gross domestic product is doing. If the number is too weak, it might make the Fed act less aggressively. There is also the matter of the upcoming elections. I doubt the White House wants to go into them with a crashing stock market. Even though they cannot force the Fed’s hand, they can influence them to dial back the rhetoric.
Fundamentally, Bank stocks have healthy underlying conditions. The bank’s balance sheets are fortresses because of tight regulations. The easy bullish thesis on bank stocks is that they have no intrinsic reasons to sell off.
Here are the three best bank stocks to buy now:
|JPM||JPMorgan Chase & Co.||$124.72|
|BAC||Bank of America||$36.73|
|GS||The Goldman Sachs Group, Inc.||$317.25|
Bank Stocks to Buy: JPMorgan Chase (JPM)
JPMorgan Chase (NYSE:JPM) has earned the reputation of being best of the best in the financial sector on Wall Street. Therefore, it earns a spot on this list of bank stocks to buy on weakness. Fundamentally, management has grown the business efficiently. Total revenues have been relatively stagnant in the last four years. However, the net income has grown substantially. Therein lies some risk if some of that came from special circumstance Fed giveaways.
Nevertheless, for now, the financial performance of management is beyond reproach. Relative valuation has grown a bit too hot, but it is nothing to be alarmed about. JPMorgan is not a bargain buy opportunity, but a tactical trade setup.
JPM stock is falling into a pivotal zone from January of 2021. If the bulls can hold the earnings lows, they can mount a 10% rally. Since this is a tactical setup, I would caution investors to stay long if they lose support. The downside from that could carry much lower and threaten to fill the gap below $108 per share. JPM stock rallied 124% out of the pandemic bottom. It has just given back half of it, which is normal price action inside of an abnormal rally. Since the moves are this big, it will be challenging to hold precise lines of support and resistance. Therefore, traders should book profits and impose specific stop-loss levels.
Bank of America (BAC)
Bank of America (NYSE:BAC) has earned a lot of kudos, especially coming out of the 2008 crisis. The government called on it to save the U.S. financial system by gobbling up dying assets. They did it — and they didn’t get much of a thank you for it. Recently, BAC stock fell 25% from its highs. This doesn’t necessarily make it a bargain as the rally was too exuberant. However, the trade opportunity that exists here is against the support near $36 per share.
This has been a pivotal level since before the Covid-19 pandemic. The stock fell apart from $36 and then retested it for support a year and a half later. BAC stock is approaching the same area, so I expect support at least the first time around. If it bounces, I expect sellers to be itching to sell it near $44 per share. Therefore, the tactical setup would be to book profits faster than normal. These bank stocks to buy are not likely to deliver large moves like GameStop (NYSE:GME).
The profit and loss statement for Bank of America is a bit of puzzle. Their total revenues shrunk since 2018, but they grew their net income. This either shows tremendous efficiency improvements, or special circumstances. If it is efficiencies, then I’m happy. Management has proven itself worthy of trust. I’m willing to give them the benefit of the doubt and not stress over the fundamentals.
Bank Stocks to Buy: Goldman Sachs (GS)
Goldman Sachs (NYSE:GS) has earned the reputation of being a shrewd bank on Wall Street. It can be a bit of a black box, so I wouldn’t put it in the same basket as the other two. Nevertheless, GS stock shows support below $310 per share. If the bulls are able to hold it, then they would have a chance at a 13% bounce.
I expected more from the stock’s earnings reaction, since they called the mega breakout for oil. One would think that they would have put their money where their mouth was since they called it so early. Nevertheless, their fundamentals are healthy. Income statements for Goldman Sachs show consistent revenue growth, but explosive bottom-line growth. Their net income last year was 2.5 times that of 2018.
Statistically, the stock is not expensive since it sells at 1.1 price-to-book value. Needless to say, the fundamentals are neither a catalyst nor a detriment. This is a pure technical opportunity arising in the GS stock chart. It will be best for traders to stop out if the supports fails. There could be another 13% risk below it before it could find footing again.
On the date of publication, Nicolas Chahine 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.