Bank Stocks May Finally Hold the Key to The Rally

by Dan July 21, 2011 9:28 am • Commentary

MS is trading up almost 5% on this morning on earnings results that topped analyst expectations (albeit dramatically lowered ones)……The reversal off of 5 2week lows by BAC and GS tuesday and the strong relative performance by WFC could signal that these stocks could help fuel leg back to the previous highs in the SPX.  

While many analysts/investors view BAC as the worst positioned name in the space, it could quite possibly be the one where you get the most bang for your buck playing for a rally into year end. Sentiment towards the name is clearly the worst in the sector.  When Q2 13F filings come out and we see who was selling BAC all qtr, then this could be an opportunity Fund’s like Paulson’s appear to have liquidated large quantities……just like you wanted to buy the governments clean-up sale in 2009, I think you will want to buy the last of John Paulson’s 123million shares in 2011.

Back on July 1st when BAC was ~$11.00 (read here) I bought a NOV 9 / 12 Risk Reversal for .21 (selling Nov 9 Put to Buy Nov 12 Call).  On July 12th I suggested I would buy back the short Put portion of this Structure when the stock was 10.40 (read here).  Well, at this point I think it is safe to put that Put back out and I am using a mental stop in the stock of ~$9.40, which marks yesterday low.  Or Consider the Nov 9/11 risk reversal which would result in a .10 credit…

If banks can stabilize and actually make an effort to get back to unchanged on the year this could added some needed fuel to the stalled rally and signal that the rally is truly broadening out.