Is the stock attractive around the current market levels?

Incorporated back in 1874 in San Francisco, the Bank of America (BAC) is a leading American multinational investment bank and a financial services company with central hubs in New York City, Hong Kong, London, Dallas, and Toronto. In fact, the BAC is the second largest banking institution in the United States after JPMorgan Chase and it is among the top 10 financial institutions in the world by revenue. Bank of America is among the Big Four banks in the US and it services approximately 11% of all American bank deposits, competing directly with the other top leading banks, such as Wells Fargo, Citigroup and JPMorgan Chase. The Bank’s main business is in the commercial banking, as well as wealth management and investment banking.

Q1 2020 and overall financial performance, coronavirus’ impact on the stock and future expectations

Bank of America’s share price has outperformed the industry over the past year, led by strong financial results and solid revenue as well as earnings figures that have been helping the company maintain its leading role and presence in the financial sector.

The company has actually beaten earnings expectations in 3 out of the last 4 quarters, which has in turn been very favourable for its overall share price performance. The Bank has been opening new branches, as well as improving their digital offerings and using different techniques for managing costs, which is expected to further increase its profitability in the future. In fact, the company has been maintaining a strong balance sheet and liquidity position over the past few years and that is also expected to continue supporting its financials and overall market positioning amid the economic slowdown caused by the coronavirus pandemic and its negative consequences. Yet, the near-zero interest rates are expected to have a negative impact on the company’s revenues and profits and that should be taken into account when analyzing the company’s financials and the expectations for the future.

Let’s have a look at the company’s financials over the past few years. Bank of America has done a great job over the past 5 years since 2015. The revenues and net profits have been rising steadily and the company has been paying a pretty decent dividend that has been yielding around 2.50-3%.

Even though the market environment has been quite challenging, deposits and loan balances have remained strong in the past few years. In fact, loan and deposit balances are expected to grow further, based on a steady demand due to the lower interest rates environment.

Based on its strong market positioning and financial performance, the company had kept on beating analysts’ earnings expectations for 4 years since 2016. In fact, the Bank has been performing a lot better than what analysts had expected and hadn’t missed on an earnings report during that period of time. Yet, because of the coronavirus and its negative impact on the economy, the company delivered a worse than expected earnings per share (EPS) figure of $0.40 for the first quarter of this year, lower than the analysts’ expectations for $0.42 (-4.76%). Yet, taking into account the negative market sentiment and the slowdown in the global economy, we believe the report wasn’t that bad actually. The positive take from this report is that the company managed to beat analysts’ revenue expectations for the first quarter of 2020.

Actually, it is important to say that due to the sell-off on the market caused by the coronavirus pandemic, sending the BAC shares from $35 to $18, followed by a strong rally towards the current levels at $25, the stock is currently trading at only 10x its earnings (P/E), which could also mean that buying the stock at around the current levels could give a great opportunity for investors to make high profits to the upside.

The BAC’s expense-saving plan called – Project New BAC, which was launched in 2011 helped the company improve its overall efficiency and save around $8 billion in operating expenses until the end of 2014. Furthermore, as mentioned above the Bank has been taking into account the current situation with the coronavirus pandemic and is expected to continue managing its expenses thoroughly, which in turn would help the leading financial institution perform quite well even during the economic slowdown caused by the virus. 

Moreover, the Bank of America has continued to align its banking sector network according to customer needs. It is expected to open 500 new centers in new cities and improve its current centers with technology upgrades by 2021. The Bank is also opening fully automated branches that will be able to feature ATMs and video-conferencing facilities, giving a chance for its customers to communicate with off-site bankers.

It is also important to say that the Bank has kept its debt pretty low compared to its competitors, which is vital for its longer-term success in the business especially during such times of uncertainty and economic slowdown.

Therefore, by analyzing the company’s favourable factors and its record of consistent earnings growth, we shall say that Bank of America has got a lower credit risk and the chances of defaulting on its interest and debt payments in this economic slowdown have decreased, which might mean that owing BAC shares could be an attractive investment.

Technical analysis

By looking at the BAC chart, we could easily see the massive sell-off that sent the price from the $35 highs on the 20th of February towards the $18 lows a month later. In fact, the stock lost almost 50% of its value during the coronavirus sell-off where investors and traders were extremely scared of the situation with the virus and started selling their stocks all across the board. Yet, that correction was seen as a great investment opportunity for the smart investors who realized the fact that they can own one of the leading Banks in the world by buying it at a significant correction that we had not seen since the financial crisis of 2008. Therefore, smart money started flooding into the market and that has led to a massive stock appreciation in the past 2.5 months, sending the price from the $18 lows to the $29 highs in early June (61% increase). The fact that the price managed to break the key resistance at $26 was seen as a very bullish factor, giving even stronger buying indications for the future.

It is important to say that the company paid dividends of $0.18 even during the current situation and the economic slowdown during the coronavirus pandemic, which was a further positive indication given by the company’s officials who have shown the investors that they are positive for the overall longer term profitability of the Bank and its success in the sector it operates.

Due to the huge bullish rally on the stock sending it 61% higher in 2.5 months, the technical indicators have gone towards the overbought territory. The RSI is at 80, while the Stochastics has reached the 100 mark, as well as the price reaching the upper Bollinger band, giving indications for a potential pullback on the price. That’s exactly what happened on the 5th of June – investors started taking some profits and the candle for the day was bearish – dropping from $29 to $28. In fact, there is a strong resistance level staying at the $29-$30 mark and investors have preferred to collect some profits after the huge bullish rally over the past couple of months. After analyzing the financial performance of the company and the great market positioning even during the coronavirus pandemic and the global economic slowdown, we remain bullish on the stock for the next few weeks and months and will be looking for buying opportunities at a strong support level that would give us a chance to follow the bullish trend and maximize our followers’ profits to the upside. By looking at the chart, we could easily see the strong support at $26-$24 which has been bringing lots of buying interest ever since 2018 and the stock kept on testing that support level but failed to break it to the downside between October 2018 and September-October 2019. Actually, the 23.6% Fibonacci retracement level is also matching with the key support at that level, giving even more bullish indications at around $26-$24 mark. In other words, lots of buying pressure has been taking place every time the price tested that level and we believe a similar price-action trade might occur once the price drops closer to that support mark.

Chart: Bank of America (BAC)

As you know, before we take an action, we at Dow Experts need to make sure our correlation-confirmation model is also giving bullish indications that would further confirm our bullish stance on the stock and only then we would be able to take an action and buy the BAC.

Financial Select Sector SPDR Fund (XLF)

The Financial Select Sector SPDR Fund (XLF) is one of the biggest ETFs out there that represents the performance of the leading financial institutions in the US.

In fact, the Bank of America is one of the biggest holdings of the XLF with its 8% weight within the portfolio, making it the 3rd biggest holding after Berkshire Hathaway (13%) and JPMorgan Chase (12%).

In other words, the XLF invests a big portion of its funds in the Bank of America and there must be a reason for that – the Bank has been a global player in the sector it operates and is expected to keep on delivering great financial results and keep improving its market positioning and overall performance.

By looking at the daily chart of the XLF, we could easily see that the chart looks very similar to the BAC. Due to the coronavirus outbreak and the sell-off on the market that followed, the XLF started dropping from its highs at $31 on the 20th of March to reach the $17.50 lows exactly 4 weeks later, followed by a massive bullish rally towards the current levels at $26. On the way up the price managed to break the key resistance level at $25, giving further bullish indications for the future. Similarly to the BAC, we could see that the XLF’s is quite overbought at the moment, which is only logical after the huge bullish movement to the upside sending the price up 52% in the past 2.5 months. Therefore, a very likely profit-taking correction would occur as the price is not only very overbought at the moment but it is also testing the strong resistance level at $26.60.

The daily chart looks like the price might make a bit of a profit-taking correction that would send it towards the key support (broken resistance) at $25 where lots of buying pressure has been taking place in the past and investors and traders have been pushing it higher from those levels. Furthermore, the 23.6% Fibonacci retracement level together with the middle Bollinger band are matching with the strong support at that level, giving even more bullish indications. In fact, the price-action trade of the XLF clearly confirms our bullish stance on the BAC and gives us even more reasons to be buying the stock after a profit-taking correction to the downside.

Chart: Financial Select Sector SPDR Fund (XLF)

SPDR S&P 500 ETF Trust (SPY)

SPY is the best-recognized and oldest ETF in the US, which typically tops rankings for largest assets under management and greatest trading volume. Actually, the SPY tracks the massively popular US index – the S&P 500.

In other words the SPY reflects all the great movements on the market and tracks the performance of the biggest index in the US, giving a chance for investors to benefit from all the day-to-day movements on the market and make high returns on their investment.

In fact, the relationship between the XLF and the SPY is 93%. That’s the reason we have decided to analyze the performance of the SPY in order to identify whether it confirms our bullish stance on the Bank of America and get an additional buying signal around the current levels.

Bank of America accounts for 1.09% of SPY’s total portfolio and is among the biggest holdings within the ETF. In other words, it plays an important role within the biggest ETF out there.

By looking at the daily chart of the SPY, we could easily see the strong uptrend that has occurred since the 23rd of March when the whole stock market in the US started recovering after the sell-off caused by the COVID-19 pandemic. In fact, the SPY has managed to bottom out at the $218 lows to reach the highs at $323 in early June, led by a profit-taking correction towards the current levels at just above $300. It was only logical to expect a profit-taking scenario after the huge bullish rally of 48% in the past few months.
Therefore, the technical indicators have gone towards the overbought territory and we have seen the RSI, Stochastics give indications for a lack of further potential to the upside in the short-term. The price touched the upper Bollinger band as well, giving further indications for a potential short-term correction to the downside. Therefore, the price made a correction from the $323 highs to reach the $300. However, similarly to the Bank of America chart and the XLF, the SPY is currently testing the a key support level at the current mark ($300) where lots of buying pressure has occurred in the past and the price is currently struggling to break below that level. The horizontal support mark at that level clearly matches with the diagonal support as well, while the middle Bollinger band line is standing exactly above the support, while the 23.60% Fibonacci retracement level is matching perfectly with the support at $300, giving further bullish indications to follow up on.

Should the price break the $300 support, it would be heading towards the next key support at $294-$290 where further buying activity is expected to take place. Therefore, we believe the downside movement on the SPY is quite limited and the recent correction would give a chance for investors to buy at almost 10% discount after the huge bullish rally in the past few months and make high profits to the upside.
Overall, the recent performance of the SPY clearly confirms our bullish stance on the BAC stock and we will be interested in adding the Bank of America to our portfolio, which would give a chance for our followers to maximize their profitability to the upside.

Chart: SPDR S&P 500 ETF Trust (SPY)

Conclusion

Our analysis today was based on the second biggest financial institution in the US, Bank of America (BAC). We have concluded that the Bank has shown a great financial performance over the past few years and has managed to perform quite well even during the COVID-19 pandemic. We like buying winners and those stocks that can perform well even during tough times on the market. Therefore, in order to confirm our bullish stance on the stock we have decided to analyze the recent performance of the leading ETFs out there who own the stock within their portfolio – XLF and SPY. In fact, both ETFs have clearly confirmed our bullish expectations on BAC and are giving very strong buying indications for the stock.

Therefore, we have decided to start buying the Bank of America stock at the first strong support mark at $24 where we are expecting to see buying interest among investors who wish to benefit from the great upside potential that the stock has to offer. Furthermore, should the price drop further, we would be buying even more aggressively at the next strong support mark currently standing at $22-$22.50 where a lot more buying pressure is expected after the correction from the $29 highs reached in the beginning of June. Our initial profit-taking target is at $26-$26.50, followed by the next target at $29 and the longer-term target at $31 where we will be fully closing our buy positions and collecting all profits.

We at Dow Experts enjoy analyzing the market and helping our followers maximize their profitability by following our trading and investing ideas, which are always supported by our rational investment approach.

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Sincerely,

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