Event: BAC reports its fiscal Q4 earnings tomorrow on Wednesday, January 15th before the open. The options market is implying about a 3.5% one day move, which is in line with the 4 qtr avg of about 3.5% and above the 8 qtr avg of about 2.75%.
Sentiment: Wall Street analysts are mixed on the stock, with 17 Buys, 20 Holds and 5 Sells, and an average 12 month price target right in line with the current stock price, around $16.50. BAC last week reached its highest level since the spring of 2010, with significant call volume to accompany a +5% start to 2014.
Options Open Interest: BAC is one of the most actively traded options names in the market. Unlike the other large cap banks, BAC actually has more call than put open interest (4.4m vs. 3.6m). Moreover, recent call volumes have been robust, with the 1 month average call to put ratio at 2.35. Of near-term strikes near current spot, the Jan18th 17 calls have the most open interest at around 220k. The Jan18th 16 calls have around 140k, and the Jan18th 16 puts have around 84k. Farther dated, the Jan15 15 and Jan15 17 calls each have over 340k of open interest, and the Jan15 12 puts have over 300k of open interest.
Price Action / Technicals: The $15 support level is crucial for BAC in the coming weeks and months. That level was resistance in the summer and fall of 2013, as well as at the start of 2011 (green below). The stock broke higher in November and has held that breakout ever since:
The stock has also been in a very clean uptrend since mid-2012, with a very constant trend of higher highs and higher lows (orange). That uptrend also comes into play around the $15 level. The main upside resistance (aside from the 2014 high of 16.93 set last week) is the 2010 high near $20.
BAC has been a strong relative outperformer to start 2014. The 2013 closing price of $15.57 also holds significance for all the portfolio managers who have gone overweight on BAC so far in 2014.
Volatility: Implied volatility in BAC is lower ahead of this earnings release than it has been for the releases over the past year, similar to the other large cap banks:
Implied vol after earnings will likely fall to the high teens after the event. However, it’s worth noting that 10 day realized volatility in BAC recently hit a 6 month high (around 28), after the blazing start for the stock to start the year. If realized volatility continues, options pricing could stay above 20 after the earnings event.
Our View: JPM kicked off the bank earnings season with its earnings release this morning. The stock is currently unchanged after an adjusted earnings beat, but a miss on revenues. Since loan loss reserve releases (a bit driver of earnings in the past) are likely to be lower in 2014 than they were over the past few years for most of the industry, the miss on revenues is a potential concern. Most of JPM’s businesses saw year-over-year declines in net revenue, but increased income due to reduced credit losses, lower expenses or higher asset prices.
Based on JPM’s numbers, the overall business climate for the large, consolidated banks is not great heading into 2014. The mortgage and investment banking businesses are flat at best, while the commercial and retail banks are better, but not by much. Since earnings expectations for BAC are their highest for 2014 since 2010, there is potential for disappointment.
However, in the near-term the stock is technically innocent until proven guilty above the key $15 support level. Until that breaks, the bulls are in control, no matter the stagnating macro backdrop.