Traders bank on Trump trade comeback

Is the Trump trade back? Some traders are banking on it.

Financials, after all, benefited hugely from the billionaire’s upset election to the White House. Hopes of less regulation and higher interest rates helped fuel the rally, which by early this year sent many banks and lenders back to levels unseen since before the 2008 subprime crisis.

Enthusiasm waned in March, followed by three months of retrenchment. Interest rates fell. Trump struggled against the press and Congress. Investors got more interested in technology executives like Tim Cook, Elon Musk, and Jeff Bezos. Even French politicians upstaged the U.S. leader for a while.

But yesterday the bulls were back in financials, led by a surge of options activity in Bank of America (NYSE: BAC):

  • A block of 58,824 July 24 calls was purchased for $0.38 about two hours into the session.
  • A matching transaction occurred in the June 23 calls, but those were sold for $0.38.
  • Owning calls fix the price where investors can buy a stock, so they can appreciate when shares move higher. Thursday’s trader apparently unloaded a winning position in the June 23s and rolled the money into the July 24s. 
  • Making the adjustment cost only commissions. It gives the investor an additional month for BAC to rally, but also raises their eventual breakeven by $1. The contracts will expire worthless if the stock remains below $24.
  • It was the largest options trade in the entire market during the session.

BAC rose 1.64 percent to $22.97 yesterday, with calls outnumbering puts by a bullish 3-to-1 ratio. It’s drifted along with its peers, but repeatedly bounced at roughly the $22 level. That could make some chart watchers think longer-term support is in place.

KBW Bank Index, 6-month chart

Source: OptionsHouse by E*TRADE

Market veterans see bigger patterns behind the moves. They noticed how interest rates slid along with the U.S. dollar earlier this year. They knew the move would benefit higher-multiple tech stocks, while stymying enthusiasm for financials and domestically focused small caps.

But things seem to be changing this month. The greenback is bouncing, the Russell 2000 is battling back against the Nasdaq, and global stocks are taking a backseat to red-white-and-blue issues. Currencies remain a key driver, this time as central bankers across the pond give traders less reason to keep plowing money into the euro.1

Eyeballs were also glued on former FBI director James Comey testifying on Capitol Hill. Sure, he scored some points, but nothing to match what many pundits had feared.2 As seasoned traders often do, they faded the headlines by returning to stocks associated with the administration’s economic agenda. (Steelmakers, a favorite of the president, rallied as well.)

Bottom line: Trump stocks like banks struggled for three months, but yesterday some investors seemed to look for a turn.


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1. Bloomberg: Draghi Says ECB Needs Patience as Inflation Stays Subdued. 6/8/17.

2. CNBC: Here's the real impact of Comey's shocking testimony. 6/8/17.