Bank of America (BAC) is seeing red today as their capital return plan got a “conditional pass” having to resubmit for the second straight year. On a day that the S&P 500 is up more than 1% and moneycenter bank stocks like Citibank and JP Morgan are up 2% and 3% respectively and investment banks Goldman Sachs and Morgan Stanley are up 3% and 6% respectively, BAC’s under-performance sticks out like a sore thumb.
And it’s not just today’s action. The chart just made a “death cross” with its 50 day moving average crossing below its 200 day moving average, depicting waning near term momentum:
[caption id="attachment_51912" align="aligncenter" width="600"]
BAC 1yr chart from Bloomberg[/caption]
While we rarely ever trade just on a technical input, this one has been good to us.
GOOGL from November (New Trade – Frugal $GOOGL):
The inability of GOOGL to keep pace with the broad market is the key, with the stock sitting flat on the year and 9% off of the 52 week highs that were made more than 8 months ago. Additionally, the declining momentum is about to manifest itself with what some technicians call the “Death Cross” where the shorter moving average, in this case the 50 day (purple below), is about to cross to the downside of a longer term moving average, in this case the 200 day (yellow below):
There’s not much scientific data as to the significance of the “Death Cross” so I don’t want to put too much emphasis on it (good recent discussion here from SeeItMarket.com), but it indicates a loss of momentum and there was an example in the last couple months that got a lot of attention as small caps, measured by the IWM, saw a nearly 10% decline following the cross:
And then in MSFT 2 weeks ago which the impending formation helped me get out of a winning trade before it would have turned into a quick loser, from February 27th (here):
A couple weeks ago we made a defined risk trade that MSFT would follow a few other large cap tech stocks in an effort to fill in their lower earnings gaps as broad market sentiment improved. MSFT has rallied close to 10% from its post earnings lows, and nearly 2.5% from where we entered the trade (below) but has lost a bit of momentum at the $44 level, and is potentially making a troubling technical formation called a death cross (the 50 day moving average crossing below the 200 day):
The waning momentum off of the stock’s lows, the weak results and price action from large enterprise vendor HPQ this week, and the impending death cross have me looking the other way on MSFT all of a sudden (a short biased trade could be coming).
So here is the thing, there is an obvious confirmation bias here, and I am sure there are far more examples of where this cross occurred and the stocks did not fall off of a cliff, but I have merely used the formation as input into a broader thesis. If BAC can’t get going, and the Fed’s statement next Wednesday remains dovish then banks could be a sale, and for the traders out there we all know that its generally a better strategy to short weakness as opposed to strength. So I’ll keep an eye on BAC as the one to target in an around the Fed meeting if it feels like banks are a good entry on the short side.