$C, $JPM, $MS, $BAC, $WFC, $XLF, $KBW
US big banks are set to kick off the corporate earnings season next week, Goldman Sachs (NYSE:GS) is advising investors to use Call options to position for a rally in financial stocks into May.
Goldman derivatives strategists underscored the “extreme under-performance” in the Financial Select Sector SPDR Fund, known by its ticker XLF, and the KBW Bank Index even after adjusting for the moves in equities, credit and rates. “We see the potential for a relief rally,” they wrote in a research note Tuesday.
Large-cap banks have under-performed their normal correlation with macro assets by more than 10% over the last two months, while the $22.7-B XLF has trailed it by 6%, the strategists wrote. They recommend buying calls on XLF and Bank of America Corp. to “position for this upside asymmetry.”
Specifically, they advise clients to buy XLF May $27 calls for 32c, Vs a stock reference price of $26.34, and the BAC May $29 calls for 78c Vs a stock reference price of $28.54.
Financial stocks came under pressure last month after Federal Reserve officials said they do not expect to raise interest rates this year. While XLF has recouped much of its post-Fed declines, it is still down more than 9% from last year’s high in September.
The strategists cite Goldman Sachs prime brokerage data coupled with the timing of under-performance that appears to show institutional investors, particularly hedge funds, are underweight financials. “This under-positioning creates a situation where upside asymmetry is undervalued,” they wrote.
The Q-1 US corporate earnings season begins in earnest next week, with big banks including JPMorgan Chase & Co. and Wells Fargo & Co. scheduled to report
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