Why Banking Stocks Could Bomb in 2016

Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), Wells Fargo & Co (NYSE:WFC), and other banking stocks could be in trouble going forward

Dec 30, 2015 at 11:34 AM
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Yesterday, we took a look at 19 stocks with bullish potential for 2016. Today, we'll do the opposite, as we turn to names that could struggle in the new year -- based on the contrarian combination of weak technicals and bullish sentiment.

A full list can be found below, courtesy of Schaeffer's Senior Quantiative Analyst Rocky White. To qualify, a stock must have been in negative territory for 2016 (based on its Dec. 28 close) and have underperformed the broader S&P 500 Index (SPX), and also have seen a decrease in short interest and an increase in the percentage of "buy" recommendations among analysts.

As is clear, banking stocks are rather prevalent on the chart below. For present purposes, we'll be zeroing in on three: Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), and Wells Fargo & Co (NYSE:WFC).

151230bearishstocks2016

As you can see, BAC has had a rough go of it, giving up over 4% on the year, and currently trading at $17.11. Nonetheless, short interest on the stock has plummeted 13.8% in 2015, accounting for just 0.6% of its total float -- meaning there's little sideline cash available to fuel a short-squeeze situation. Likewise, the percentage of analysts rating Bank of America Corp a "buy" or better has exploded by 22.8% in the past year to 78%, suggesting future downgrades could be in store.

It's a similar set-up for both C and WFC, which have put in poor showings on the charts over the long-term. However, just 1.1% of Citigroup Inc's float is sold short, and 87% of analysts consider it a "buy" or better. Likewise, Wells Fargo & Co's short interest has fallen 30.7% in 2015 to a slim 0.6% of its float, while the percent of "buys" has increased 8.2% to 63%. This leaves both stocks vulnerable to a sharp reversal in sentiment.

Taking a step back, the banking sector in general has struggled in 2015. Among the 29 stocks we track at Schaeffer's, the average year-to-date return is negative 8.2%. Yet, the typical stock has over half of its covering brokerages rating it a "buy" -- up slightly year-over-year -- and just 2.4% of its float dedicated to short interest.

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