Buffett's Bank of America (BAC) Position Draws Muted Response

Legendary investor Warren Buffett and Berkshire Hathaway Inc. (BRK.A) purchased more than 20 million shares of Bank of America Corporation (BAC) between July 28 and July 30, instituting a $520 million bet that the banking industry will undergo a dramatic recovery in the next one or two years. The purchase looks risky, at least from a layman's point of view, given the threat of a lengthy recession in a low interest rate environment that will hamper banking industry profits.

Key Takeaways

  • Bank of America stock has gained about 5% since the Buffett announcement.
  • The stock is still trading below major resistance at the 200-day moving average.
  • The company has underperformed broad benchmarks throughout the bull market.

In addition, the commercial banking sector has underperformed broad benchmarks for the past decade, held down by weak investment, low interest rates, and the funneling of corporate profits into stock buybacks rather than capital spending that requires new lending facilities. Bank of America has been an especially weak performer during this period and has now dropped back to October 2008 price levels. 

The disclosure by Buffet has generated a modest uptick, lifting shares about 5%. However, the stock is still trading below the 200-day exponential moving average (EMA), which was broken on heavy volume in late February. A June test reinforced resistance that has now dropped to $26.50, which has narrowly aligned with a breakdown through 2019 support. Given technical barriers and the relatively meek reaction, Buffett's investment isn't likely to generate short-term rewards.

A stock buyback occurs when a company buys back its shares from the marketplace. The effect of a buyback is to reduce the number of outstanding shares on the market, which increases the ownership stake of the shareholders.

Bank of America Long-Term Chart (2006 – 2020)

Long-term chart showing the share price performance of Bank of America Corporation (BAC)

A long-term uptrend topped out at an all-time high near $55 in 2006, giving way to a pullback that accelerated into a near death spiral during the 2008 economic collapse. Selling pressure settled at a multi-decade low in the single digits in March 2009, ahead of a recovery wave that topped out at $19.86 in 2010. That marked the highest high for the next six years, while the subsequent downturn posted higher lows in 2012 and 2016.

A breakout after the presidential election caught fire, lifting the stock into the low $30s in the first quarter of 2018. It pulled back from that level, carving a descending trendline of lower highs into an October 2019 rally that reached the prior peak a few weeks later. The subsequent breakout added just three points into the December high at $35.72 and eased into a small double top pattern that broke to the downside during the first quarter's pandemic swoon.

A double top is an extremely bearish technical reversal pattern that forms after an asset reaches a high price two consecutive times with a moderate decline between the two highs. It is confirmed once the asset's price falls below a support level equal to the low between the two prior highs.

Bank of America Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of Bank of America Corporation (BAC)

The on-balance volume (OBV) accumulation-distribution indicator fell to the lowest low since December 2018 in March 2020, while buying pressure into August has retraced about 75% of the distance back to the high. Price has retraced just one-third of the first quarter loss, generating a bullish divergence that may support continued upside. However, multiple overhead levels are unlikely to break without much stronger buying volume,

The March decline ended at 2016 breakout support, while the subsequent bounce reversed after mounting the 200-day EMA and tagging the .618 Fibonacci selloff retracement level. Price action then settled around the 50-day EMA before turning higher in July. The uptick into August still hasn't filled the June 11 gap, which is a prerequisite to a second test at the broken long-term moving average. Given multiple obstacles, new shareholders need to lower their enthusiasm because the journey to profitability could take months or longer.

The Bottom Line

Bank of America stock has gained ground after Warren Buffett disclosed a new position, but his holdings may not pay off for several years.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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