This post was written exclusively for Investing.com
Shares of Bank of America Corp. (NYSE:BAC) and Citigroup Inc. (NYSE:C) were pummeled after the Fed turned dovish, but they may be poised to bounce back sharply, according to the options market and technical charts.
Both lenders’ shares could climb as much as 8% over the next few weeks after plunging following the Fed’s pivot on monetary policy, as investors fretted about how lower interest rates may affect the banks’ profitability.
Since March 18, the shares of Bank of America and Citigroup have fallen by as much as 9% versus an S&P 500 which has dropped by less than 1%. That may be about to change.
Bulls Return to Citi
Citigroup’s stock has seen bullish betting in its options in recent days. Open interest levels of the calls for expiration on April 18 at the $64.50 strike price have jumped by over 20,000 contracts, a bet the stock will rise. As of March 27, those calls have a premium of about $0.45 per contract, and for a buyer of the calls to earn a profit the stock would need to rise to roughly $65 by the expiration date.
The technical chart for Citigroup supports the bullish outlook the options suggest. The stock has managed to hold a critical region of technical support around $60 to $61 recently. This support level has been in place since the beginning of 2019, with the stock rebounding each time. Should this level continue to hold the stock is likely to rebound to a long-term downtrend at roughly $65, a gain of about 7%.
Positive Views on Bank of America
A similar thing is happening with Bank of America stock; it’s also seen bullish betting in recent days at the $29 calls for expiration on May 17. The number of call contracts has increased by roughly 35,000 bringing the total number of open contracts to around 75,000. For a buyer of the calls to earn a profit, the stock would need to rise to approximately $29.40, a gain of about 8% from its price of $27.10 on March 27.
The technical chart suggests the shares rise agreeing with the options bets. The stock had filled a technical gap created when the shares jumped higher on Jan. 16 which is now acting as a level of support at roughly $26.80. Additionally, the stock found further support at a downtrend that has been in place since mid-August. Should support hold at both levels, the shares could rise to resistance around $28.
Estimates Could Fall Further
One reason why investors have grown so bearish on the banks is that the Federal Reserve has signaled it sees no more rate hikes in 2019, while also trimming their growth outlook for the U.S. economy. This resulted in yields on the 10-year Treasurys falling by roughly 25 basis points and may negatively impact the banks’ net-interest income --pressuring profits. Additionally, a slower-growing economy could hurt the two lenders’ ability to grow loans, also hurting revenue and earnings growth.
Since the beginning of February consensus analyst earnings estimates have fallen by over 1% and are trending lower for the companies. The events of the past week could result in those estimates falling even further. Both banks have done a relatively good job in the past managing investors’ earnings expectations, even topping those estimates on multiple occasions. Both are expected to report results in the middle of April.
There is always the risk that the two stocks fall below the support levels noted above due to the increasing volatility in the broader market, resulting in an even steeper decline. But for now, the momentum and the bets seem to suggest a rebound may be in the works, at least over the short-term.
Disclaimer: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.