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Beware Bank of America (BAC)

Financials are a lagging sector, which is setting options traders up for a bearish play.


Video Transcript

We’re watching Bank of America (NYSE:BAC) really closely. Here’s the deal: Bank of America has massive exposure to European debt stability, and that’s in the form of credit default swaps.

If you don’t know what that market is, it’s a weird, institutional market. It’s the biggest in the world by far. It’s bigger than all of the bond markets combined. It’s bigger than the currency market by orders of magnitude in notional value. If you net out all of the long and the short credit default swaps, then you come up with a much smaller number.

The only problem is nobody knows what the real net actually is. The comptroller of the currency in the United States, which is probably the best source of aggregate information, tries to monitor this market and they don’t even know. They have no idea. Bank of America does know. JPMorgan Chase (NYSE:JPM) doesn’t know, nor do Goldman Sachs (NYSE:GS), etc. There are about five banks in the United States that really dominate that business, and then, of course, there are other international players.

Well, Bank of America has massive exposure to that market, so even very subtle changes in the environment for credit stability in Europe would be very destabilizing for Bank of America, hence the reason why they sold off so sharply recently and it’s really been lagging the rest of the market to the upside.

Again, if we look at sector rotation, we see manufacturers going crazy, a few transport companies going completely nuts and everybody is kind of lagging a little bit. So, those sectors that were performing really well that had a disproportionately large impact on the indices, which really are focused on those kinds of companies, and we get finance just lagging. JPM did pretty well, but BAC is really lagging.

Article printed from InvestorPlace Media,

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