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Plunging bond yields have sent the stock market into a tizzy. And "inverted yield curve" is the new buzzword littering news sites everywhere. In today's gallery, we'll shed light on what all the fuss is about and identify three bank stocks to sell.
When investors see turbulent seas on the horizon, they seek shelter. And nothing is perceived as a safer place to hide from the storm than treasury bonds. The demand surge sends prices to the moon and yields (which move inverse to prices) into the basement. Buyers' appetite has been so voracious that the 30-year treasury yield just dipped below 2% for the first time ever.
The beating in long-term rates has been so severe that they've fallen below short-term rates creating the so-called yield curve inversion. It's a signal that has precipitated every recession in the modern era and has investors justifiably spooked.
And that brings us to bank stocks. When long-term interest rates fall below short-term interest rates, it puts a damper on their earnings potential. Throw in the specter of a recession, and you have a toxic brew poisoning the performance of financial companies.
Let's take a closer look at three bank stocks to sell.
Bank Stocks to Sell: Bank of America (BAC)
Bank of America (NYSE: BAC ) has been a ship without a rudder this year. Ever since its January rally reversed the fourth-quarter beatdown, BAC stock has been chopping in a range, unable to pick a direction. This month's market bloodbath has pushed BAC 15% off its highs.
The stock is now testing the lower end of its range and is threatening a breakdown that would deal a nasty blow to its technical posture. Given the speed of last year's descent and the January rebound, there isn't much support between $26.50 and $22.50. The downside follow-through could be swift if buyers don't emerge to defend the $26.50 zone.
Even if we don't breach support, Bank of America's stock chart is a hot mess that will need time to heal. If you want to speculate on further downside, buying the November $28/$23 put spread for $1.80 is a solid idea. The risk is $1.80, and the reward is $3.20.
Wells Fargo (WFC)
Wells Fargo (NYSE: WFC ) has fared worse than BAC this year. It completely reversed January's strength and is fast-approaching December's pivotal low of $43. If anything, the relative weakness makes WFC a more tempting target for bear trades and a better bank to bail on if you own it.
All major moving averages are pointing lower, making it impossible to spin a bullish narrative. With the price submerged beneath these trend-following indicators, rallies remain suspect and strength is made for selling.
A break of $43 would push WFC stock to a six-year low and complete a multi-year top on its trend. If you're holding out hope that bulls swoop in to save it, then consider $43 your abandon ship point.
To bank on additional weakness, consider buying the November $45/$40 put spread for $1.80. The risk is $1.80, and the reward is $3.20.
Regional Banking ETF (KRE)
Our final pick aims for the entire banking sector via the Regional Banking ETF (NYSEARCA: KRE ). Its diversified holdings offer exposure to mid-size banks across the nation. It is thus very sensitive to economic shifts that adversely impact the sector.
The past six months have seen a vicious tug-of-war between bulls and bears. This week's breakdown finally declared sellers the victor and spells trouble for KRE stock's technical posture. Yesterday's drop has the fund testing the $49 support area. A breakdown could send it back to December's low at $44.
If you believe bears will continue to roam through year-end, then buy the December $50/$45 put spread for $2. The risk is $2, and the reward is $3.
As of this writing, Tyler Craig didn't hold a position in any of the aforementioned securities. Check out his recently releasedBear Market Survival Guideto learn how to defend your portfolio against market volatility.
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