Bank of America (NYSE: BAC) is probably the most hated banking stock right now. Despite the company doing everything it can to boost the investor confidence, nothing seems to be working in its favor. The U.S. Fed's decision to hold off any interest rate hike this month and the regulatory hurdles are adding to more pain for the investors.
Earlier, fears regarding the banking giant's exposure to the oil and gas sector weighed heavily on the stock (and the entire financial sector), but as the sector recovered, those fears have subsided.
Many investors now have their hopes pinned on interest rate hikes to support the Bank of America stock price. But, if we witness further delays in the next interest rate hike from the U.S. Fed, will the stock continue to underperform? Is the reasoning that the stock will soar when the Fed next hikes rates sensible enough in itself to consider investing or remain invested in BAC? Honestly, I don't think so.
According to the Yahoo Finance price estimates, analysts foresee the stock at $17.40 in one-year time with a high target of $20 and a median target of $17.
These analysts, and obviously the market, have priced in all of the above-said negatives in their calculations. Now, what the market tends to do is move beyond the general consensus. It front-runs all the expected earnings for the next couple of quarters, and also has a fair idea of what to expect in the next year' financial results.
While it is not an easy task to figure out what the market is expecting, we can try to approximate it by understanding its language. Technical analysis is the language of the market. Many investors often disregard this field of analysis, but, it is important to comprehend that no investment has to base entirely on TA. Instead, valuable information derived from TA should be coupled with the fundamental inspection of a business to figure out better investing and exiting levels. At this point, it must be emphasized that almost every stock becomes so overvalued at least once to be considered fit for selling, and extremely undervalued to be included in the portfolio. Some exceptions to this assertion cannot be ruled out.
Technically, bearish signals galore!
In the short-term, it is a very tough job to perfectly call out the stock movements. I have been wrong many a times in the short-term, but have had better success in the longer term.
To rule out the short-term noise, I have used the monthly price chart of Bank of America below, which suggests that the stock broke out of a two-year strong distribution pattern in January. It immediately fell to $11 in February but has quickly rebounded since then to retest the bottom of the previous range. Expectedly, the stock faltered post the retest at $15 and is trading at $13.34 at the time of writing.
On most occasions, when a stock breaks out of such a big consolidation phase, the movement is not limited to the next couple of months, in fact, a long decline in the share price ensues.
As per the chart above, the breakout occurred on rising volumes which is a testament that the investors will not return in a hurry.
The rally which began in late-2011 from $4.92 topped out near $18.50 last year. Applying Fibonacci retracements to this rally gives us a 23.6% retracement at $15.28 - the level from which BAC recently rebounded. The stock pierced the 50 percent retracement of $11.69 in this Feb's crash but I expect it to head even lower in the coming months. The 61.8% retracement level is considered a great buying level, which in this case is near $10.
Another strong bearish indication comes from the Money Flow Index. Interestingly, from the period since the stock entered its two-year consolidation, the monthly MFI has been declining on a consistent basis. Although many would refute is as unhelpful given the over-stretched period the stock has taken to break down, it certainly boosted the possibility that the breakout will eventually be on the downside. Unfortunately, the decline has just started!
Stop Over-Emphasizing Tangible Book Value
Bank of America's Tangible Book Value is $162.46 billion while the company is trading for $137 billion. This implies that the stock is trading for ~0.84x TBV. Analysts seem to be obsessed with this metric of BAC, and some even recommend buying it solely on this basis.
However, Mr. Market knows better, and does not depend only on TBV for buying this banking giant. After the financial meltdown of 2008-09, the company's TBV continues to rise steadily from sub-$30 billion to north of $162 billion at present, but the stock remains capped on the upside, failing to reach a higher ground.
What the market is more worried about is the management's inability to improve its top-line when its competitors such as JP Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) have shown better growth in revenues.
Another reason why investors are not too attracted towards BAC is the lower dividend yield compared to its competitors.
BAC - 1.50%
JPM - 3.10%
WFC - 3.25%
I can be very wrong about the future price movements in BAC stock, but things do look terrible from the technical as well as fundamental perspectives. In my opinion, the stock can certainly provide a much higher margin of safety in the coming months, and investors should go aggressive then, and not now.
Use technical analysis as a helpful guide and not as the base study for investment decisions.
I am pessimistic on BAC and expect to see $10 by the end of this year.
Disclosure: I am/we are short BAC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.