NEW YORK (TheStreet) -- New information from the FDIC shows the four "too big to fail" money center banks still control the lion's share of assets in the banking system, which faces some pretty significant hurdles ahead. These challenges will make for volatility in the banking stocks, which provides ample trading opportunities.
The banking system's not out of the woods yet, as the largest banks remain too big to fail and still face tougher capital requirements. While it's slowly improving, as evidenced by recent willingness to make risky real estate loans to homebuilders, news of big fines on the banks and the potential for additional penalties has caused lots of up and down volatility in the stocks.
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According to preliminary third-quarter FDIC data secured from the FHFA, in total the four "too big to fail" money center banks control 43.4% of the total assets in the banking system. This is down slightly from 43.7% in the second quarter.
To break it down, Bank of America's (BAC) total assets declined 5.1% in the third quarter to $1.550 trillion, 10.2% of the total assets in the banking system. Citigroup's (C) total assets increased 0.7% to $1.379 trillion, 9.1% of the total assets. JP Morgan's (JPM) total assets increased 0.9% to $2.158 trillion, 14.2% of the total. Wells Fargo's (WFC) total assets increased 1.3% to $1.508 trillion, 9.9% of the total.
Meanwhile, a notable improvement in the banking system is a willingness to increase real estate lending to homebuilders and community developers. Construction and development loans rose by $11.6 billion in the third quarter to $310.6 billion, up 3.9%. This is helping homebuilders construct single family homes on speculation. Commercial real estate loans, which include multifamily construction, increased by $29.3 billion to $1.645 trillion, up 1.8%.
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Despite that positive development, "too big to fail" banks may soon be forced to raise more capital, as the world's banking regulators proposed that the "Global Systemically Important Banks" should hold loss-absorbing capital at 16% to 20% of the risk-based assets. Also, there may be more fines in store for the largest banks for their roles in the financial crisis of 2008.
With what could be a wild ride ahead, here's how to trade the "too big to fail" banks:
Shares traded to a multiyear intraday high at $18.03 on March 21 then corrected 20% to its 2014 intraday low at $14.37 on May 16, breaking below its 200-day simple moving average when it was $15.47 on April 28. The stock returned to the 200-day SMA at $15.54 on June 6 and the momentum run-up of 21% from the low to its second half intraday high at $17.41 on Oct. 6. Another correction of 11% took the stock to as low as $15.43 on Oct. 15 which was followed by a 13% rally to challenge the high once again.
Given Citigroup's ($53.89) break-out to a new high, investors should book profits using a "good 'til canceled" limit order to sell strength to a key technical level at $63.50.
Shares of Citigroup traded to a multiyear intraday high at $55.28 on Jan. 9 then corrected 20% to its 2014 intraday low at $45.18 on April 11, breaking below its 200-day simple moving average when it was $50.26 on Jan. 24. The stock returned to the 200-day SMA between March 20 and Aug. 18 before a momentum run-up of 20% from the low to as high as $54.13 on Sept. 19. Another correction of 11% took the stock to as low as $48.11 on Oct. 15 which was followed by a 13% rally to a second half intraday high at $54.30 on Nov. 6.
Given JP Morgan's ($61.93) break-out to a new high, investors should book profits using a "good 'til canceled" limit order to sell strength to a key technical level at $69.50. Investors looking to buy this stock should enter a "good 'til canceled" limit order to buy weakness to another key technical level at $57.40.
JP Morgan set a first-half 2014 trading range declining 14% from an intraday high at $61.48 on March 25 to its 2014 low at $52.97 at May 16. The stock then had a momentum run-up of 17% from the low to as high as $61.85 on Sept. 19. Another correction of 12% took the stock to as low as $54.26 on Oct. 15 which was followed by a 14% rally to an all-time intraday high at $61.93 on Nov. 10.
Wells Fargo ($53.83) investors should book profits using a "good 'til canceled" limit order to sell strength to a key technical level at $55.90.
Investors looking to buy this stock should enter a "good 'til canceled" limit order to buy weakness to another key technical level at $50.95.
Shares of Wells Fargo dipped to $44.17 on Feb. 5, then began a momentum run-up of 22% to as high as $53.80 on Sept. 19. The stock then corrected by 14% to a low of $46.44 on Oct. 15. Since this low the stock rallied 17% to an all-time intraday high at $54.25 on Nov. 7.
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At the time of publication the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff
TheStreet Ratings team rates BANK OF AMERICA CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate BANK OF AMERICA CORP (BAC) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its expanding profit margins and solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
You can view the full analysis from the report here: BAC Ratings Report