The number of bogeymen haunting the Street is increasing. From tariffs and trade wars to crashing oil prices and a global economic slowdown, traders have a growing number of concerns to worry about. One of the new kids on the block that is making the rounds in the financial media and weighing on bank stocks is the inverted yield curve.
For the uninitiated, a brief review is in order. The yield curve tracks borrowing costs for the U.S. treasury of varying durations. Usually, long-term bonds carry higher interest rates than short-term bonds thus creating an upward sloping curve. But in the latter stages of an economic expansion (like now), short-term rates can rise above long-term rates due to the Federal Reserve hiking interest rates to fend off inflation while traders keep long-term rates depressed in anticipation of economic weakness.
The most common comparison is viewing the yield on 2-year versus 10-year treasuries.
Bank stocks are particularly vulnerable to an inverted yield curve for two reasons. First, it hampers corporate profits by shrinking the gap between what they have to pay on deposits and what they receive on loans. Second, it typically foretells of economic weakness on the horizon, which will hurt banks’ bottom line.
Here are three bank stocks dropping precipitously this week.
JPMorgan Chase (JPM)
JPMorgan Chase (NYSE:JPM) has long been a leading stock in the financial sector, but with this week’s swoon, it is on the cusp of completing a weekly bearish reversal pattern. This year’s trading range is looking more like a potential double-top formation that may well spell the end of its bull market.
This week’s nasty bearish candle is ushering JPM stock to the support zone which, if broken, will officially complete the topping pattern and bring ominous implications. A breach of $102 will confirm the top and signal the weekly charts’ official entrance into a downtrend.
Buy the Mar 2019 $105/$90 bear put for $4.45 to bet on JPM’s continued demise.
Bank of America (BAC)
The weekly trend of Bank of America (NYSE:BAC) has already reversed lower and sports one of the ugliest bearish engulfing candles I’ve seen in a long time. This week’s drop has gone the distance from the upper to lower end of BAC stock’s two-month range.
And with this morning’s plunge, BAC is threatening another breakdown that could ultimately send it to the low $20s. Indeed, $22 is the next major horizontal support level and thus a logical longer-term target.
To profit from continued weakness, consider buying the May 2019 $26/$21 bear put for $1.50.
Our final selection is the weakest of the bunch. Citigroup (NYSE:C) has already fallen 27% from its 2018 peak and is threatening to break below its 200-week moving average. It’s also beneath every other major moving average on its daily time frame.
In the short run, C stock has become quite oversold, so some backing-and-filling or perhaps a snap-back may be in order. But make no mistake, this is a stock to be sold into any strength.
If it can rally back toward $62 over the coming week, consider deploying long-term bear put spreads. I prefer that to shorting into the hole here.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want insightful education on how to trade? Check out his trading blog, Tales of a Technician.