Oversold Bank of America Stock Slapped With Downgrade

KBW is cautious on the banking sector in 2019

KBW is cautious on the banking sector in 2019, saying it does not "see enough positive catalysts emerging," and suggesting traders "stick with quality and self-help stocks." Additionally, the brokerage firm downgraded several bank stocks to "market weight" from "overweight," including Bank of America Corp (NYSE:BAC). KBW also dropped its BAC price target to $29 from $34 -- still an 18% premium to last night's close.

Despite the downgrade, BAC shares are up 0.3% in early trading at $24.65. The stock has shed more than 25% from its mid-March post-recession peak of $33.05, and hit a 15-month low of $24.29 on Monday. Underscoring this technical weakness, Bank of America is bracing for its worst quarterly performance since March 2016, down 16.6% so far. As such, the equity's 14-day Relative Strength Index (RSI) settled at 28 last night -- in oversold territory -- suggesting a short-term bounce may have been in the cards.

Options traders have remained upbeat, though. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculative players have bought to open 35,104 calls in the last 10 sessions, compared to 67,530 puts. The resultant call/put volume ratio of 5.24 ranks in the 81st annual percentile, meaning calls have been bought to open over puts at a quicker-than-usual clip.

At least some of this buying activity was centered at the weekly 12/14 26-strike call, which saw nearly 88,000 contracts added in the last two weeks. Data from the major options exchanges confirms a number of these positions were purchased in recent weeks, suggesting speculators are betting on BAC stock to bounce back above $26 by expiration at the close this Friday, Dec. 14.