I was under the impression that Bank of America (BAC) was about to slow down last time I looked at the stock. I addressed this in my article and suggested a short term income strategy to capitalize on the slow down. This is the suggestion I originally made:
The Option Play
Honestly, at this point I would go for a straight Put option buy at "9."
- Buy the January 2013 put with a strike of '9' (priced at $0.49)
- Net Debit to Start: $0.49
- Maximum Profit: unlimited
- Maximum Risk: net debit
- Maximum Length of Trade: 2 months
Reasoning Behind the Trade
- Stock looks like it is weakening
- Fiscal cliff will wreak havoc on the markets short term
- I see no short term bullish catalysts ahead
My observations were way off. I could not see a short term bullish catalyst and it has not stopped moving up after a consolidating period. Okay, so what do I think 2013 holds for Bank of America?
Bullish Bank of America
The big bank stock has moved up much faster than the market as a whole over the last quarter. It has grown more than 70% in value since mid summer and now that the fiscal cliff deal has been penned, it works in BAC's favor.
In fact one analyst, JMP Securities, upgraded the stock to market perform from underperform. Even with the huge growth in the stock, some analysts still believe it has more room to move in 2013. The most notable would be that of Evecore. Already carrying an overweight rating on the company, it added the stock to its conviction list. It is true that the improvements in mortgage banking and a growing housing market helps the big banks, but most analyst believe this is already priced into the markets.
Bank of America is still repairing this division of the company as it reduces its risk and continues to cut expenses. Sometime in 2013 analysts also believe the Federal Reserve will let the bank begin its capital gains deployment after the 2013 stress test process is complete. Evecore has a price target of $13 on the stock, so the gain in value it sees for the company is limited but the intangible gains through continued healing of the mortgage division and capital gains deployment will lead to future growth post-2013.
Bank of America continues to reduce its mortgage risk; presently it is in talks to sell mortgage servicing rights on more than $300 billion of loans in its ongoing effort to offload problem mortgage exposure. This division of the company continues to be a revenue bleeder as assisting delinquent homeowners gets very expensive. Even though costs have ballooned in 2012 for this division, CEO Brian Moynihan believes the bank is well on its way to controlling expenses and should be able to bring them down to about $500 million per quarter-down from $3.4 billion in the third quarter.
Investing in Bank of America Long term
2013 may not be a big "value growth" year for Bank of America since it grew so much in 2012, but I believe it will be a good year for the company as it continues to heal itself from past problems. 2013 may be a good year that lays the foundation for better long term value growth in the years to come. Do not expect a lot in 2013, but if you invest now, I believe it will be a good long term hold.
Last time the stock signaled an over bought signal from the RSI indicator, it ended up consolidating, not reversing the trend. Bank of America continued to move up again and we find ourselves in the same place-over bought in the RSI. Two other conditions we observe in a trend reversal are a high point from the MACD MA's which we do not have yet and a weakness seen as the stock moves in the Bollinger Bands. We do not see this yet either. The stock is still hugging the upper band which means a very strong bullish move. As for a trend reversal, we may be in the beginning stages of a signal. But I would not expect it in the next two weeks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.