Bank stocks have not been performing well. In fact, they've been under tremendous pressure.
It doesn't matter that Warren Buffett holds massive positions in a number of bank stocks or that he took a new stake in Action Alerts PLUS holding JPMorgan (JPM) - Get Report last quarter. It also doesn't seem to matter that interest rates continue to increase.
Generally, rising short-term rates are a boon for the banks. However, the shrinking spread between long- and short-term rates isn't a good thing for them. As short-term rates increase faster than long-term rates, this lowers the yield curve.
As the yield curve flattens, banks have a harder time with profitability. That worsens when the yield curve inverts, which occurs when short-term rates yield more than long-term rates. Right now, just a few basis points separate many bonds' yield curves from flattening out and even inverting.
If this situation weren't enough of an issue, an inverted yield curve is also associated with a recession. While a recession may not come for another 12 months, it's still not an encouraging sign for investors or bank stocks -- even though we're not primed for a repeat of the Great Recession.
These catalysts cause worry among bank investors, as stocks like Bank of America get pushed lower and lower. That's despite the company trading at less than 10 times earnings, prepped for growth this year and next year, and yielding 2.4%.
Trading Bank of America Stock
Despite a solid case for owning the stock -- as noted above -- there is such a thing as a broken stock and not a broken company. I believe that to be the case for many of the banks. These companies are flush with cash and have strong balance sheets. They have cleaned up many of the misdeeds and leverage they were tied to during the Great Recession.
However, the stocks that make up this sector have not been trading well; they're broken. So what do we do with Bank of America stock?
The stock came into December near $29. Shares promptly bumped into resistance and plunged afterward. The stock is down a little more than 15% so far this month, as the $24.50 level is holding up as decent support. That should give long-term investors some confidence in the name if they're adding to their position. Even short-term bulls may be encouraged by the action.
The banks are due for a rally and BAC is no exception. However, the stock broke below downtrend support (blue line), which is currently up near $26. To get back to this level, it would take a rally of roughly 6%. Should that happen, short-term bulls may want to consider locking in some profit. Short-term bears may look at taking a short position if this level acts as resistance. If BAC can get over downtrend support (blue line), then shares can rally into the upper-$20s.
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This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned.