3 Bank Stocks Ready to Bounce Amid Positive Stress Test Results

The Fed determined that large banks can weather an economic downturn

Bank stocks have lagged the broader market in the second quarter, pressured by the prospect of lower interest rates in the back half of 2019 that investors fear may crimp margin wiggle room. The sector received a much-needed boost on Friday, June 21, after the Federal Reserve (Fed) said that the country's 18 largest banks successfully passed stage one of the yearly Dodd-Frank Act stress tests – measures created after the 2008 financial crisis to ensure that U.S. lenders can withstand a major economic downturn.

"The nation's largest banks are significantly stronger than before the crisis and would be well-positioned to support the economy even after a severe shock," Fed Vice Chair Randal Quarles said in a statement, per CNBC.

On Thursday, June 27, the Fed will release the findings of its second, more rigorous test that assesses whether it is safe for banks to implement their capital plans – such as share repurchase programs and dividend increases – along with the outcome of reviews on operational controls and risk management.

Those wanting to position for a rally into the Fed's second-round stress test should monitor these three bank stocks that aced stage one. Below, we take a closer look at each company, along with its stock chart, and work through several trading ideas.

Bank of America Corporation (BAC)

Founded in 1874, Bank of America Corporation (BAC) provides banking and financial products and services to individual consumers, institutional investors, large corporations, and governments. Raymond James analyst David J. Long believes that Bank of America's stable Tier 1 common capital ratio – which came in 9.7%, well above the Fed's minimum requirement of 4.5% – will allow it to increase its dividend payout and deploy a share repurchase program, per Barron's. As of June 25, 2019, Bank of America stock has a market capitalization of $266.04 billion, issues a 2.13% dividend yield, and is up 15.34% on the year.

Despite forming a broad inverse head and shoulders pattern between October and March, the Bank of America share price has failed to add further upside. Price action has oscillated within a four-point trading range since February, offering range-bound traders with several opportunities on both the long and short side of the market. More recently, the price has retraced to the $28 level, where it encounters support from a horizontal line and the 200-day simple moving average (SMA). Those who buy here should set a take-profit order near the April swing high at $31 and place a stop order below the June 7 wide-ranging day at $26.99.

Chart depicting the share price of Bank of America Corporation (BAC)

The PNC Financial Services Group, Inc. (PNC)

The PNC Financial Services Group, Inc. (PNC) operates as a diversified financial services company across four segments: Retail Banking, Corporate and Institutional Banking, The Asset Management Group, and BlackRock. As well as posting a healthy 8.5% Tier 1 common capital ratio, the Pittsburgh-based bank sits well positioned to benefit from eased regulations that reduce the capital requirements for U.S. lenders with $250 billion to $700 billion in assets. Trading at $133.67 with a $60.34 market cap and offering a 2.85% dividend yield, the stock has returned almost 16% year to date (YTD), outperforming the U.S. regional banks industry average by 3.62% as of June 25, 2019.

PNC shares have trended steadily higher through the first six months of 2019. The banking stock's chart generated a buy signal in mid-May when the 50-day SMA crossed above the 200-day SMA, forming what technical analysts refer to as a "golden cross" – indicating the emergence of a new uptrend. Traders could either buy Monday's bounce from the 50-day SMA or wait for a close above a trendline connecting the August 2018 and April 2019 swing highs. Consider booking profits on a test of the 52-week high at $143.93 and setting a stop-loss order beneath the June 20 hammer candlestick low at $130.06.

Chart depicting the share price of The PNC Financial Services Group, Inc. (PNC)

State Street Corporation (STT)

State Street Corporation (STT) offers financial services to institutional investors, including investment servicing, investment management, investment research, and trading. The $20.8 billion asset manager flagged a double-digit Tier 1 common capital ratio of 10.9%, easily exceeding the Fed's minimum benchmark. Raymond James has maintained its "strong buy" rating on State Street stock, believing it to be one of the winners from the Fed's stress test, per the same Barron’s article. Analysts from Raymond James have a $68 price target on State Street stock – implying upside potential of 22% from Monday's $55.73 closing price. On the earnings front, State Street has topped analysts' expectations over the past two quarters. The company's shares pay a 3.39% dividend yield – the highest of the three stocks discussed – but have also suffered the steepest decline, falling 10.89% YTD as of June 25, 2019.

The bears have controlled State Street's share price over the past 18 months, apart for a 12% counter-trend rally in January. However, as the stock's price moved lower earlier this month, the relative strength index (RSI) made a higher low to form a bullish divergence, suggesting that the sellers may be losing their momentum. Traders who take a long position should look for a move to $65, where the price may encounter overhead resistance from several significant swing lows over the past nine months. Manage risk by keeping a stop under June 11 low at $53.53 and amending it to the breakeven point if price rises above the 50-day SMA.

Chart depicting the share price of State Street Corporation (STT)
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