It doesn't look like the financial crisis is over, based on the stock price of Bank of America Corp (NYSE:BAC). Trading at levels not seen since March 2009, Bank of America is in danger of slipping below a very significant price level. The latest credit rating downgrade won't do the beleaguered bank any favors.

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S&P Downgrade
On Nov. 29, Standard & Poor's slashed the credit rating of 15 big European and U.S. banks, including Bank of America. Citigroup Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Company (NYSE:WFC) and Goldman Sachs Group, Inc. (NYSE:GS) were cut, as well. The downgrade is really no surprise, given the warnings that S&P has been delivering for more than a year. Most likely, there will be minimal impact on the ability of these banks to obtain capital. However, there will be a psychological impact upon an already fragile perception of these banks. The sovereign debt crisis is threatening to unhinge the European banking system, and U.S. banks have suffered from association. (Banks are a part of ancient history. For more, see The Evolution Of Banking.)

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Dangerous Price Level
Eurozone contagion has pushed many big bank stocks to their 2011 lows. Bank of America just took out its 52-week low, is down about 60% year-to-date and is now in jeopardy of trading below the technically important $5 price level. The covenants of several big funds prohibit the purchase of stocks that trade under $5 per share. At this price level, many broker-dealers disable buying on margin, as well.

If Bank of America does fall and hold below $5 a share, technical factors will be yet another obstacle to overcome. Citigroup was in a similar position, before their reverse stock split. After plunging just below $1, Citi stock rallied and failed several times to hold above $5. The reverse stock split was executed, in part, to bypass this resistance level and create a more "acceptable" price. (For related reading, see Understanding Stock Splits.)

Time to Worry?
There's a multitude of factors working to send Bank of America below the $5 price level, yet U.S. banks, Bank of America included, are in surprisingly good shape, compared with their counterparts across the Atlantic. As I noted in this article, U.S. banks are extremely well capitalized. Liquidity positions are at their strongest levels in decades; deposits are surging into American banks that already have huge reserves. U.S. banks can be profitable and the quality ones have been beating earnings expectations.


The problem is that the market is assigning a huge risk premium to U.S. banks, creating a crisis of confidence. The result has been a disregarding of fundamentals and declining stock prices. Fear is driving these bank stocks; until the fear trade capitulates, it's a big risk wading into financials right now.

The Bottom Line
At this point, risk averse investors really only need a few reasons to buy banks. Excellent capital positions, high reserves and strong profitability are all good counters to the many headwinds facing financials. Any reason not to buy makes it difficult to feel confident, because of the huge risk premium. S&P's downgrade of Bank of America may not make much difference, but it sure doesn't help. If the stock does indeed fall through and hold below the $5 price level, things may get a lot tougher for Bank of America.

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At the time of writing, Matt Cavallaro did not own shares in any of the companies mentioned in this article.