Wall Street is pricing in a rate hike from the Fed on Sept. 26
The Federal Open Market Committee (FOMC) will convene for its two-day policy meeting next week, with the central bank widely expected to lift interest rates. While banks generally benefit from higher rates, a pair of bank stocks have suffered in the short term after previous rate hikes. Here's why it may be time to short -- or hedge your position on -- Bank of America Corp (NYSE:BAC) and Goldman Sachs Group (NYSE:GS) stocks.
We've already outlined the best and worst stocks to own after a Fed meeting, but what about after a Fed rate hike? While this pair of healthcare stocks tends to rally after rate hikes, BAC and GS have been among the worst S&P 500 stocks to own a week after the central bank raises rates, looking back to 2015.
BAC has averaged the biggest one-week loss after a rate hike, at 3.09%, per data from Schaeffer's Senior Quantitative Analyst Rocky White. Further, Bank of America shares have been higher a week later just 14% of the time.
Since touching a post-financial crisis high of $33.05 on March 12, the bank stock went on to form what looks like an inverse "head and shoulders," with a "neckline" around $31-$31.50, and the "head" at the July trough of $27.63. Wall Street pros typically say to buy the shares once they make a definitive breakout back north of the neckline. However, even if the shares do break out, they'll have to contend with the aforementioned March highs. At last check, BAC is down 0.5% to trade at $31.03. Another post-rate hike slide of 3.09% would put the equity just above $30.
Goldman stock, meanwhile, has averaged a one-week loss of 2.39% after a rate hike, also ending higher just 14% of the time. The shares also peaked in mid-March, at $275.31, and have since formed a similar chart pattern, with a neckline around the $245 area. This level is also home to GS' 200-day moving average. In afternoon trading, the security is 0.7% lower at $235.67. A post-Fed pullback of 2.39% would place Goldman stock around $230.
In conclusion, while an upside breakout beyond the aforementioned necklines could have bullish implications for BAC and GS, short-term headwinds could be facing the bank stocks after a rate hike next week, if history is any indicator. The good news, though, is that near-term options on both stocks are attractively priced right now.
Bank of America sports a Schaeffer's Volatility Index (SVI) of 19%, and Goldman's SVI stands at 20%. Both SVIs are in the bottom 20% of their annual ranges, meaning short-term options are pricing in relatively low volatility expectations at the moment.