4 Banks To Trade Ahead Of The FOMC Data

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 |  Includes: BAC, C, GS, JPM, MS, WFC
by: Markos Kaminis

There could be a short-short-term long opportunity for day traders in the shares of big banks over the next two days. The FOMC meeting minutes release due Wednesday at 2:00 PM EDT might offer a special short-short-term opportunity for the shares of the relatively beaten down and highly sensitive group.

A good portion of the market believes the Federal Reserve might act in some sort of supportive manner now that the European situation seems to be infecting both China and the vulnerable U.S. economy. While some say there's nothing the Fed can really do at this point that might have positive effect on the economy, including me, others still believe the Fed can make a difference. Then there's the group that trades on the prospects of Fed action.

The Federal Open Market Committee (FOMC) meeting minutes for the June meeting could show the Fed closer to action than distant from it. That sort of information might lift, however temporarily, a sector highly sensitive to our economic health. Thus, I think the big banks might provide an interesting short-short-term trade opportunity over the next day or two.

The banks most sensitive are probably Bank of America (NYSE: BAC) and Citigroup (NYSE: C), with Morgan Stanley (NYSE: MS), Goldman Sachs (NYSE: GS), J.P. Morgan (NYSE: JPM) and Wells Fargo (NYSE: WFC) sensitive but less interesting to me. In fact, because of the Friday earnings reports of J.P. Morgan and Wells Fargo, I would leave those two out of any short-short-term long trade.

The valuations of these banks are supportive of an upside opportunity in my view.

Bank & Symbol

Price-to-Book

Forward P/E

Beta

BofA

0.38

7.7

1.87

Citigroup

0.42

5.8

1.98

Morgan Stanley

0.45

6.5

1.96

Goldman Sachs

0.7

7.6

1.63

JP Morgan

0.71

6.5

1.66

Wells Fargo

1.3

9.1

1.1

Click to enlarge

The price-to-book valuations of Bank of America, Citigroup and Morgan Stanley are especially depressed. Though it's for good reason, this leaves the shares especially sensitive to upside surprises or good news generally. The beta ratios likewise show the shares excessive sensitivity to market swings, and the latest stock price action seems to offer fertile ground for gains.

Based on the data, I would favor the use of Bank of America , Citigroup and Morgan Stanley shares for this trade. This is a highly speculative investment idea that could very easily be undermined by unexpected news or data that could reach the wire Tuesday afternoon or Wednesday before the FOMC release. However, the weekly schedule does not indicate much risk of a monkey wrench. The FOMC release itself could even undermine the trade, so you might want to take some of your accumulated prospective profits off the table just ahead of the release. I think the actual result will be determined by the market's evolving view of Fed impact. The action of these stocks should at minimum serve as a barometer of that.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BAC, C, MS over the next 72 hours.