Steer Clear of These Stocks After a Fed Rate Hike

While banks typically benefit from higher rates, Bank of America stock tends to drop in the short term

Managing Editor
Dec 12, 2017 at 12:48 PM
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The Federal Open Market Committee (FOMC) kicks off its highly anticipated December meeting today, with the central bank widely expected to announce a rate hike tomorrow. Against this backdrop, we decided to take a look at some of the worst stocks to own when the Fed hikes interest rates, with banking concern Bank of America Corp (NYSE:BAC) and Dow component Cisco Systems, Inc. (NASDAQ:CSCO) topping the list.

BAC Stock Could Pull Back This Week

Since 2015, the Federal Reserve has hiked interest rates four times, the last coming in June. If past is prologue, BAC stock could retreat in the next week, per data from Schaeffer's Senior Quantitative Analyst Rocky White. The security has never been higher a week after the last four rate hikes, and averaged a loss of 3.51%. 

worst stocks week rate hike

Bank of America stock has added nearly 32% year-to-date. The equity touched a nine-year high of $29.34 earlier today, as bank stocks rally ahead of the Fed decision, with the shares last seen 1.4% higher at $29.35. If a drop of similar magnitude were to occur next week, BAC stock could find itself trading around $28.31 -- but still north of its 50-day moving average, which contained its November pullback.

Although bank stocks tend to be benefactors of the Fed's interest rate hikes, there's more evidence BAC could be primed for a short-term breather. The stock sports a 14-day Relative Strength Index (RSI) of 70 -- firmly in "overbought" territory -- in the wake of a recent surge on tax reform optimism and the Basel III agreement.

In the options pits, short-term traders have been starting to lean toward BAC puts over calls by a wider-than-usual margin. The security has a Schaeffer's put/call open interest ratio (SOIR) of 0.90, a ratio that ranks in the high 95th annual percentile.

Digging deeper, the January 2018 27-strike put has seen one of the biggest rises in open interest during the past 10 days, with 57,426 contracts added. Data from the major options exchanges shows a mixture buy-to-open and sell-to-open activity at this strike. "Vanilla" traders who bought to open the out-of-the-money puts are expecting the stock to dip below this strike before the early weeks of 2018, though some of the recent buying activity could be attributable to Bank of America shareholders seeking an options hedge.

Cisco Stock Could Lose Momentum To Start 2018

Cisco stock tends to struggle a month after a Fed rate hike. The equity has never been positive a month out, with an average loss of 5.11%. It is the only Dow component to find itself on such a ignominious list. 

worst stocks month after rate hikes

CSCO stock has had an excellent year, tacking on 25% year-to-date and touching a 16-year high of $38.04 yesterday. From the equity's current perch of $37.90, another 5.11% dip within the month would put CSCO around $35.96 -- right where the stock landed after a mid-November post-earnings bull gap. In addition, the equity sports a 14-day RSI of 69, on the cusp of "overbought" territory, suggesting a short-term breather may be in the cards.

In the options pits, Cisco Systems stock's SOIR of 0.96 ranks 4 percentage points from a 52-week high. This indicates that short-term options traders have rarely been more put-heavy on CSCO in the last 52 weeks. However, analysts remain decidedly bullish, with 15 of 19 offering up "buy" or better ratings. Should the blue chip once again retreat after a Fed rate hike, it could be vulnerable to bearish ratings adjustments.

In any case, options traders looking to speculate on CSCO stock's near-term momentum can do so at a relative discount. The equity's Schaeffer's Volatility Index (SVI) of 16% is in just the 15th percentile of its annual range, pointing to relatively mild near-term volatility expectations priced into Cisco options.

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