With January inflation running hotter than expected, it's time to go long big bank stocks.
I like banks here as a place to hide out from possible rising U.S. inflation. Not only have they benefited from a deregulatory environment, but we're also starting to see life in the yield curve. The all-important 2/10 spread is banging around at 76-77 basis points as I write this, up from 50-ish very recently.
Meanwhile, the market's recent volatility should benefit the more aggressive names among the banking group. Amid last week's madness, I initiated longs in both Bank of America (BAC) - Get Bank of America Corp Report and Goldman Sachs (GS) - Get Goldman Sachs Group, Inc. (GS) Report , with small nibbles close enough to the week's lows.
I bought Bank of America for the prospect of improving conditions for traditional banking and Goldman for its known aggression when markets allow traders to trade. As the week starts, I'm up small in Bank of America and down small in Goldman Sachs. Let's take a look at Bank of America's chart and see what I see:
What stands out on this daily chart of Bank of America? First, the Chaikin Money Flow (CMF) remains positive despite a weakening Relative Strength Index.
There's also a very sloppy Moving Average Convergence/Divergence oscillator (MACD) that sports a nine-day exponential moving average deep in negative territory. What I see is support that did indeed show up at almost a precise 38.2% retracement off of the recent top. This stock also closed Friday at its 50-day simple moving average, which will only be significant in hindsight if this works.
Now I know that I'm going out on a limb here, but if that Fibonacci level holds and forms the crook of the Pitchfork's elbow, I see support for Bank of America rising to levels around $32 within a month.
Am I crazy? My wife thinks so, but I'm not a daredevil. I'm only long about an eighth of my targeted position size.
Should Bank of America take off, this becomes a trade rather than an investment. But should we head toward last week's lows and beyond, I have plenty of dry powder set aside for this one.
(A longer version of this column appeared on Real Money, our premium site for active traders. Click here to get great columns like this from Stephen "Sarge" Guilfoyle, Jim Cramer and other experts every market day.)
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At the time of publication, Guilfoyle was long BAC and GS, although positions may change at any time.