Bank Stocks Have Had Monster Runs -- Now What?

Comments by Federal Reserve Chair Janet Yellen then a wave of bank earnings will drive bank stocks over the next three days. 

The four huge money center banks, those considered "too big to fail," have generally outperformed the top five super-regional banks, both year to date and since their post-election lows. Only Citigroup (C) and JP Morgan (JPM) set their post-election highs as July began. These two big banks benefited the most from recent "stress tests" by the Federal Reserve. Stress tests do not help the banking system; they just allow the big banks to increase dividends and share buyback plans.

Seven of the nine biggest banks set their post-election highs as March began. Wall Street analysts have buy ratings on the big banks for the second half of 2017. I disagree, investors should consider reading cautious comments by the Federal Deposit Insurance Corporation over the last two quarters, just as a tidal wave of earnings is on the horizon.

Before the potential earnings tsunami Fed Chief Janet Yellen will testify before Congress on Wednesday and Thursday. Her comments could cause volatility among banks stocks. Of particular interest, will be the effect of reducing the Fed's balance sheet, which essentially un-prints money and removes cash from the banking system just when funds are needed for healthcare reform and infrastructure spending. Congress should not allow this to happen.

Citigroup, JP Morgan and Wells Fargo (WFC) report earnings before the opening bell on Friday, along with PNC Financial (PNC) . Bank of America (BAC) reports on July 18. M&T Bank (MTB) and U.S. Bancorp (USB) report on July 19. BB&T Corp (BBT) reports on July 20. SunTrust (STI) reports on July 21.

Scorecard for 9 Biggest Regional Banks
Scorecard for 9 Biggest Regional Banks

Citigroup is the best year-to-date performer, with a gain of 12.4%. JP Morgan has the largest post-election gain of 47.2%, solidly in bull market territory. BB&T is the weakest of the major banks, down 3.5% year to date. The weakest since its post-election low is U.S. Bancorp with a gain of 16.1%.

Data from the Federal Deposit Insurance Corporation shows that loan growth slowed during the fourth quarter of 2016 and the first quarter of 2017. Most Wall Street analysts expected the pending softening of Dodd-Frank lending standards, would allow banks to increase lending but that did not happen.

When looking at the weekly charts below, the 200-week simple moving averages shown in green are considered the "reversion to the mean" for each stock. The "reversion to the mean" is an investment theory that the price of a stock will eventually return to a longer-term simple moving average.

The 200-week simple moving average is easy to track. A stock trading above its 200-week simple moving average will eventually decline back to it on weakness. Similarly, a stock trading below its 200-week simple moving average will eventually rebound to it on strength.

Bank of America
Bank of America
Courtesy of MetaStock Xenith

The weekly chart for Bank of America is positive with the stock above its five-week modified moving average of $23.90 and above its 200-week simple moving average of $17.08, which is the "reversion to the mean." The 12x3x3 weekly slow stochastic reading is projected to rise to 64.96 this week up from 54.24 on July 7.

Trading strategy: Buy weakness to my semiannual and quarterly value levels of $22.35 and $20.55, respectively. Sell strength to my monthly risky level of $29.81.

Citigroup (C)
Citigroup (C)
Courtesy of MetaStock Xenith

The weekly chart for Citigroup is positive but overbought with the stock above its five-week modified moving average of $64.61 and above its 200-week simple moving average of $51.54, which is the "reversion to the mean." The 12x3x3 weekly slow stochastic reading is projected to rise to 84.51 this week moving above the overbought threshold of 80.00.

Trading strategy: Buy weakness to my semiannual and quarterly value levels of $57.47 and $52.70, respectively. Sell strength to my monthly risky level of $71.89.

JP Morgan
JP Morgan
Courtesy of MetaStock Xenith

The weekly chart for JP Morgan is positive with the stock above its five-week modified moving average of $89.35. The stock is above its 200-week simple moving average of $65.51, which is the "reversion to the mean." The 12x3x3 weekly slow stochastic reading is projected to rise to 71.30 this week up from 61.88 on July 7.

Trading strategy: Buy weakness to my semiannual, annual and quarterly value levels of $84.91, $84.24 and $81.55, respectively. Sell strength to my monthly risky level of $104.41.

Wells Fargo
Wells Fargo

The weekly chart for Wells Fargo is positive with the stock above its five-week modified moving average of $54.33. The stock is above its 200-week simple moving average of $51.31, which is the "reversion to the mean," which was last tested on May 31. The 12x3x3 weekly slow stochastic reading is projected to rise to 58.18 this week up from 47.70 on July 7.

Trading strategy: Buy weakness to my quarterly value level of $47.60. My annual pivot is $55.97. Sell strength to my semiannual risky level of $63.60.

BB&T Corp
BB&T Corp
Courtesy of MetaStock Xenith

The weekly chart for BB&T is positive with the stock above its five-week modified moving average of $44.43. The stock is above its 200-week simple moving average of $38.60, which is the "reversion to the mean." The 12x3x3 weekly slow stochastic reading is projected to rise to 53.31 this week up from 55.10 on July 7.

Trading strategy: Buy weakness to my annual and quarterly value levels of $42.32 and $40.26, respectively. My semiannual pivot is $45.52. Sell strength to my monthly risky level of $51.25.

M&T Bank
M&T Bank
Courtesy of MetaStock Xenith

The weekly chart for M&T Bank is positive but overbought with the stock above its five-week modified moving average of $161.59. The stock is above its 200-week simple moving average of $126.00, which is the "reversion to the mean." The 12x3x3 weekly slow stochastic reading is projected to 80.46 this week rising above the overbought threshold of 80.00.

Trading strategy: Buy weakness to my semiannual and quarterly value levels of $150.62 and $146.96, respectively. My annual pivot is $165.89. Sell strength to my monthly risky level of $192.92.

PNC Financial
PNC Financial
Courtesy of MetaStock Xenith

The weekly chart for PNC Financial is positive with the stock above its five-week modified moving average of $123.57. The stock is above its 200-week simple moving average of $92.92, which is the "reversion to the mean." The 12x3x3 weekly slow stochastic reading is projected to rise to 68.98 this week up from 61.24 on July 7.

Trading strategy: Buy weakness to my semiannual and annual value levels of $120.75 and $112.67, respectively. Sell strength to my monthly risky level of $145.20.

SunTrust
SunTrust
Courtesy of MetaStock Xenith

The weekly chart for SunTrust is positive with the stock above its five-week modified moving average of $56.28. The stock is above its 200-week simple moving average of $42.74, which is the "reversion to the mean." The 12x3x3 weekly slow stochastic reading is projected to rise to 57.41 this week up from 48.71 on July 7.

Trading strategy: Buy weakness to my semiannual and quarterly value levels of $55.65 and $51.56, respectively. Sell strength to my monthly risky level of $66.33.

U.S. Bancorp
U.S. Bancorp
Courtesy of MetaStock Xenith

The weekly chart for U.S. Bancorp is neutral, with the stock just below its five-week modified moving average of $51.84. The stock is above its 200-week simple moving average of $43.81, which is the "reversion to the mean." The 12x3x3 weekly slow stochastic reading is projected to rise to 53.85 this week, up from 49.96 on July 7.

Trading strategy: Buy weakness to my annual and quarterly value levels of $50,37 and $48,64, respectively. Sell strength to my semiannual and monthly risky levels of $53.28 and $58.83, respectively.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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