Traders bank on major lenders
07/26/17

Has the tide turned for banks? Some traders seem to suspect so.

Those paying attention at home have no doubt noticed more than a few bulls beginning to crowd into the sector over the last six weeks. It started with a wave of call buying in early June. Then, regulators gave firms a clean bill of health and took off their training wheels from the 2008 financial crisis.1 Strong quarterly earnings followed earlier in July,2 and this week buyers are clamoring for a piece of the action once again.

Some eagle-eyed chart watchers are trained on Bank of America (NYSE: BAC). Back in February, the mega-lender touched its 50-day moving average…and bounced. Then in April and May it got trapped below that level and took a beating from the bears. But now it’s rallying off the 50-day moving average. Support, resistance, support: Technical analysts love it when indicators show directional swings like that.

BAC matters because it’s the busiest financial for options traders, typically averaging 2-3 times more contracts than major peers like JPMorgan Chase (NYSE: JPM) and Citigroup (NYSE: C). Yesterday BAC even outstripped the market’s usual volume champion, a stock that needs no introduction, tech giant Apple (NASDAQ: AAPL).

Bank of America (BAC), 1-yr chart

Source: OptionsHouse by E*TRADE

Buyers piled into BAC’s 28-July 25 calls. They went to work just seconds after the opening bell and kept at its every hour as the session progressed. Almost 62,000 options changed hands when it was all said and done, making for the busiest contract in any name all day. 

Calls fix the level where a security can be purchased. Traders use them to leverage quick moves, but also accept the risk of losing all their money if no rally occurs. Tuesday’s calls, for instance, mostly priced for about $0.05. They’ll break even if BAC climbs to $25.05 and double every additional nickel that the stock advances. But if it closes below $25 the contracts will expire worthless. BAC ended the day up 2.38 percent to $24.48.

Speaking of expiration, those calls only last through the end of this week. What’s the hurry? Well, as most readers know, the Fed is scheduled to announce monetary policy at 2 p.m. ET today. Attention is focused on the timing of asset sales, which have the potential to lift long-term interest rates. That, in turn, could be bullish for banks that make money from those same rates moving higher.

And the plot thickens: oil has been exploding higher this week.3 Forecaster models say continued upside in energy could lift inflation, also boosting the good ole yield curve. On top of that are continued hopes for tax cuts later this year.4

Bottom line: Bank stock movements have been consolidating all year, and some traders are looking for a breakout.

 

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1. Reuters: Fed gives big U.S. banks a green light for buyback, dividend plans. 7/28/17.

2. Credit Suisse: Not Much More One Could Have Asked For; 2Q17 Takeaways. 7/18/17. Credit Suisse: Better than Expected 2Q; Better than Expected CCAR 2017; Raising our TP to $72. 7/16/17. Bank of America Merrill Lynch: No change to solid outlook; Reiterate Buy. 7/16/17.

3. Reuters: Oil rallies 3 percent as U.S. shale shows signs of slowdown. 7/24/17.

4. CNBC: Paul Ryan says tax reform will get done because GOP is 'much more unified' on issue. 7/20/17.