Bank of America Corporation (BAC) is the second largest of the four "too big to fail" money center banks, with total assets of $1.814 trillion at the end of the third quarter of 2018 versus $1.776 trillion at the end of the second quarter. This represents 10.3% of the total assets in the banking system according to data from the Federal Deposit Insurance Corporation. The stock has a reasonable P/E ratio of 10.94 and offers a dividend yield of 2.31% according to Macrotrends.
Bank of America stock closed last week at $26.03, up 5.6% so far in 2019. The stock may be up 14.9% since its Dec. 24 low of $22.66 but is also still in bear market territory at 21.2% below its March 12, 2018, high of $33.05.
Analysts expect Bank of America to post earnings per share between 63 cents and 65 cents when the company reports third quarter earnings before the open on Wednesday, Jan. 16. The diversified banking giant provides credit cards, asset management and other related services. Some say that a slowing global economy will be a drag on Bank of America as demand for loans declines. The bank has beaten estimates for 10 consecutive quarters – thus, a beat on Wednesday will not be as important as forward guidance.
The Federal Reserve balance sheet remains a drag on banks. On Jan. 9, the balance sheet was marked at $4.056 trillion, down $444 billion since October 2017, when it was $4.5 trillion. The first drain of 2019 was just $2 billion, but I believe that the drain will grow to $30 billion to $50 billion in January and be in this range for each month of 2019. It will be determined by Federal Open Market Committee (FOMC) concerns and the calendar of maturing U.S. Treasuries that occurs on the 15th of each month and on the last day of each month.
My call for the FOMC: Look for the Federal Reserve to raise rates in June and December to end 2019 with a "normal" federal funds rate of 2.75% to 3.00%. The Fed will be draining $30 billion to $50 billion from the balance sheet each month as Treasuries mature.
The daily chart for Bank of America
Bank of America stock has been below a "death cross" since Oct. 16, when the 50-day simple moving average fell below the 200-day simple moving average, indicating that lower prices would follow. The 50-day and 200-day simple moving averages are now $26.29 and $29.00, respectively. The 2018 close of $24.64 was the input to my proprietary analytics that generated my annual value level at $24.07; monthly and semiannual risky levels at $26.45 and $26.66, respectively; and my quarterly risky level at $31.15. The middle horizontal line reflects the conversion of the monthly and semiannual levels. On Jan. 2, the low of $24.01 was an opportunity to buy the stock at my annual value level of $26.07.
The weekly chart for Bank of America
The weekly chart for Bank of America is positive, with the stock above its five-week modified moving average of $25.89. The stock is also above its 200-week simple moving average, or "reversion to the mean," at $21.91, which is a buying level on weakness. The last test of the "reversion to the mean" came during the week of Sept. 30, 2016, when the average was $15.12. The 12 x 3 x 3 weekly slow stochastic reading rose to 25.08 last week, up from 17.75 on Jan. 4 and rising above the oversold threshold of 20.00.
Given these charts and analysis, investors should buy Bank of America shares on weakness to my annual value level at $24.07 and to the "reversion to the mean" at $21.91 and reduce holdings on strength to my monthly, semiannual and quarterly risky levels at $26.45, $26.66 and $31.15, respectively.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.