Buy This Bank Stock Before the Fed Meeting

The Fed is expected to hike rates at its June meeting

Jun 1, 2018 at 2:22 PM
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Bank stocks are trading higher today, after this morning's strong jobs report strengthens the case for a June rate hike from the Federal Reserve. The market is currently pricing in a 91.3% chance the Federal Open Market Committee (FOMC) will raise its key interest rate at the June 12-13 policy-setting meeting. Ahead of the event, shares of Discover Financial Services (NYSE:DFS) are up 0.7% at $74.38 -- and it could be a good time to buy the stock, if history is any guide.

According to Schaeffer's Senior Quantitative Analyst Rocky White, DFS has been one of the best stocks to own on the S&P 500 Index (SPX) over the June-August period, looking back the past 10 years. On average, the shares have gained 7.35% over the three-month period, and have ended in positive territory 70% of the time.

While the shares have added roughly 25% on a year-over-year basis, their more recent price action has been choppy. After topping out north of $81 in late March -- a chip-shot from their late-January record high of $81.93 -- DFS stock pulled back to familiar support at its 200-day moving average, and is now trading between a 38.2% and 50% retracement of its May rally. Another 7.35% June surge would put the security back near $80.

dfs daily price chart june 1

There's plenty of skepticism to be unwound on DFS stock, too, which could help fuel a June rally. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 3.07 ranks in the 89th annual percentile, meaning puts have been bought to open at a quicker-than-usual clip -- albeit amid relatively low absolute volume.

Elsewhere, short interest surged nearly 23% in the most recent reporting period to 4.86 million shares -- the most since early March. A capitulation from some of the weaker bearish hands could keep the wind at DFS stock's back. A round of upgrades could draw more buyers to the bank stock's table as well, considering eight of the 19 analysts covering the shares maintain a "hold" recommendation.

Now appears to be a prime time to buy call options on DFS stock. For starters, the equity's Schaeffer's Volatility Index (SVI) of 22% ranks in the 26th annual percentile, indicating premium on short-term options is relatively cheap, from a volatility perspective. What's more, the equity's 30-day implied volatility skew of 21.4% ranks higher than 89% of similar readings taken in the past year, suggesting calls are pricing in lower volatility expectations than their put counterparts.


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