Bank of America May Drop 8% to Test 2018 Low

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Bank of America Corp.'s (BAC) stock is more than 8% off its 2018 highs, and it looks to be heading even lower. Technical analysis suggests the stock may fall as much as 8%. Should the stock fall, shares would be back to their lowest levels of 2018. (For more, see also: Bank of America May Fall by 10% on Slower Growth.)

The bank's stock rallied in July after the company delivered better than expected results, and a $26 billion capital return plan. But shares have taken a turn lower since the end of August. Investors’ attention has once again returned to interest rates and the yield curve.

BAC Chart

BAC data by YCharts

Technical Weakness

A bearish sign is that shares have fallen below a critical level of technical support at $30.25. The next level of support for the stock comes around $27.90, a drop of 7.5% from its price of $30.10. Additionally, shares fell below a technical uptrend, at the beginning of September, which is another bearish indication.

The relative strength index has been trending lower since peaking at an overbought level above 70 in January. A sign of the bullish momentum is leaving the stock. Additionally, volume has increased recently as the price has dropped. It indicates a rising number of sellers.

Falling Yields

Investors became bullish on the stock and the other banks in July, after quarterly results. It was also when yields for the U.S. 10-year Treasury rose back to 3%, causing the yield curve to steepen. But now that interest rates are falling investors are growing more bearish on the stock and the sector. The difference, or the spread, between the U.S. 2-year Treasury yield, and the 10-year yield has fallen to less than 25 basis points, its lowest level since 2007. Meanwhile, the spread between the U.S. 5-year Treasury rate and the 2-year has dropped to approximately 11 basis points.

The narrowing spread can have a negative impact on banks interest income, and cause revenue growth to slow or even decline.

BAC Chart

BAC data by YCharts

Shaving Estimates

It may be one reason why analysts' revenue estimates for the banks have been falling. Analysts now see revenue growing by 4% in 2018, down from prior estimates of 5% in April. Additionally, earnings estimates have dropped, and are forecast to grow by almost 39% in 2018, down from the previous forecast of more than 40%. (For more, see also: Why Big Bank Stocks Are About to Crumble.)

The current technical pattern for the bank looks bleak. Should yields continue to fall, and worries about a flattening yield curve persist, the stock is likely to continue to struggle. But should inflation fears begin to creep back up, and yields start rising, the stocks likely to benefit the most will be the banks, and Bank of America.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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