Beware These Bank Stocks in the Short Term

BAC and C are higher today after hot inflation data, but could retreat next week, if history repeats

Feb 14, 2018 at 12:48 PM
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Bank stocks are widely higher today, as a hotter-than-expected inflation report fuels speculation about accelerated rate hikes from the Fed. However, if recent history is any indicator, several financial stocks could dip in the short term, including Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C).

BAC Stock Tends to Slip After Presidents Day

Bank of America stock was last seen 1.2% higher to trade at $31.55. As with most stocks, the month of February started out rough for BAC, which took a dive after notching a post-financial-crisis high of $32.67 on Feb. 2. While the security has recovered most of those losses, near-term speed bumps could be in store, if past is prologue.

BAC one-year chart

Per data from Schaeffer's Senior Quantitative Analyst Rocky White, BAC has been among the worst stocks to own during Presidents Day week (next week). Over the past 10 years, the bank stock has ended the week higher just 20% of the time, and averaged a loss of 3.62%. A similar drop from current levels would have BAC trading around $30.40.

Another post-Presidents Day retreat could spook a few near-term option bulls. Bank of America stock sports a Schaeffer's put/call open interest ratio (SOIR) of 0.56, indicating that near-term call open interest roughly doubles put open interest. This ratio is in the 23rd percentile of its annual range, indicating short-term options traders have rarely been more call-biased on BAC shares.

Citi Pullback Could Surprise Recent Option Bulls

C stock is up 1.3% at $76.16, at last check. As with BAC, Citigroup shares plummeted out of the gate in February after notching a nine-year high of $80.70 on Jan. 29, but found support atop their 160-day moving average. The equity is now attempting to claw its way back atop the 80-day trendline, which contained pullbacks in the latter half of 2017.

Citigroup stock one-year chart

However, Citi stock also tends to struggle during Presidents Day week. Over the past decade, the banking issue has ended the week higher just 30% of the time, averaging a loss of 4.5%. From the equity's current perch, a similar drop would put C around $72.37 -- just north of the 160-day.

A similar pullback next week could take quite a few Citigroup options traders off-guard. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock sports a 10-day call/put volume ratio of 3.71. This ratio sits in the 89th percentile of its annual range, pointing to a much healthier-than-usual appetite for bullish bets over bearish on the bank stock during the past two weeks. As such, the equity's SOIR sits at 0.53, in just the 7th percentile of its annual range.

However, recent buyers of near-term Citi options have been speculating at a relative bargain. Even with the heightened stock market volatility of late, C sports a Schaeffer's Volatility Index (SVI) of 25% -- above just 4% of all other readings from the past 12 months. This indicates that near-term options are pricing in relatively muted volatility expectations for Citigroup stock right now.


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