After trading in a relatively wide range in the last quarter, the Wells Fargo & Company (WFC) share price recently rose ahead of the news of the company’s fiscal fourth quarter results. Wells Fargo recently pushed higher into a relatively small area in terms of buying volume. Analysts predict the bank will post earnings per share (EPS) of $ 0.99 on revenue of $ 18.62 billion. This represents an expected increase of almost 60% in profit compared to the same quarter a year ago.
The financial sector has seen growth in recent times, with investors appearing to seek stocks based on value rather than speculative growth. Wells Fargo stock has nearly doubled the recent pace of the booming financial sector, rising 15.4% in the past month. This could be because bank stocks were generally viewed as undervalued, while Wells Fargo in particular has a more attractive entry price per share.
Options traders appear to be taking positions showing that they believe the recent rise in stock prices will continue in the near term. This is because recent trading volumes strongly favor call options over put options, and open interest seems to illustrate that traders are buying options while selling puts. The stock also recently broke through an area typically marked by high trading volume to set a new 52-week high.
Over the past month, Wells Fargo has outperformed each of the top 10 holdings of the State Street Financials ETF (XLF), except The Charles Schwab Corporation (SCHW). This came as the sector outperformed the market as a whole as investors continued to seek stocks positioned to benefit from high inflation and rising interest rates going forward.
Key points to remember
- Traders and investors sharply increased the price of Wells Fargo shares.
- The Wells Fargo share price recently broke through a volume-based resistance zone.
- The financial sector has recently outperformed the market.
- Wells Fargo has been one of the leaders in this hot industry.
- The open interest in calls and puts appears to be positioned for the price to continue to rise in the short term.
Recent industry performance
Wells Fargo is one of the top ten holdings of the State Street Financials ETF (XLF). The sector has recently been one of the few sectors to outperform the market as a whole. Over the past month, XLF rose 7.1%, while State Street’s S&P 500 Index (SPY) ETF rose 0.6%. The graph below illustrates the recent performance of WFC and XLF against nine of SPY’s main sectors.
Note on this graph that sector rotation seems to show that investors are positioning themselves to prepare for a more hawkish Federal Reserve policy, including raising interest rates to fight inflation. The best performing sectors – Energy (XLE), XLF, Consumer Staples (XLP) and Healthcare (XLV) – are seen as relatively “safer” bets in times of heightened regulatory pressure. This is because these sectors reflect needs and necessities, rather than wants or speculative growth.
The worst performing stocks – tech (XLK) and consumer discretionary (XLY) – typically underperform in times of high inflation. Rising interest rates may dampen tech stocks due to their high leverage, while consumer discretionary declines due to the assumption that consumers’ purchasing power will decline, with the emphasis on ” needs ”rather than“ wants ”. This sector rotation could allow traders and investors to anticipate the next stage of the economic cycle.
Breaking down the financial sector
The financial sector itself is a part of the economy made up of businesses and institutions that provide financial services to business and retail customers. This sector includes a wide range of industries, including banks, investment companies, insurance companies and real estate companies.
The financial sector is considered a good investment in an economy where interest rates are rising, as companies in this sector tend to increase the rates they charge for loans they make to others. In addition, many of these companies borrowed capital at a lower rate depending on market conditions in previous years. This creates a natural tailwind for all of the core financial activities of these businesses.
The chart below compares the recent performance of Wells Fargo with the major holdings of the State Street Financial Sector ETF (XLF).
This chart helps to illustrate how over the past month, and more specifically since the start of 2022, individual stocks in the sector have moved higher. In fact, of the top ten holdings of XLF, the only stock to show a loss during this period is BlackRock, Inc. (BLK).
Wells Fargo recently overtook Berkshire Hathaway Inc. (BRK.B) as the second best performing stock in the industry, behind Schwab. This could be because investors are highly anticipating Wells Fargo’s earnings.
Comparing price action and options trading can provide chart watchers with insight into how traders and investors feel about a company’s future performance. However, additional volume price action context could illustrate areas of support and resistance, which could provide additional context for open option interest. The chart below illustrates the recent Wells Fargo price action, in addition to a price-based volume pattern on the left side.
The recent trading range of the Wells Fargo share price is highlighted in blue. The range is quite wide, peaking at the $ 52 level, with a lower limit around $ 47. This trading range coincides with the heaviest volume areas, illustrated by the volume profile on the left side of this chart.
This price-based volume model describes the prices at which investors have bought and sold stocks previously. A noticeable amount of buying in the past often implies that investors will feel the desire to defend their positions at those same prices by buying more stocks or at least not selling anymore. When the volumes at a given price are low or nonexistent, it implies that few or no investors need to defend their positions at these levels.
Notable thin areas of volume appear above the trading range from which Wells Fargo recently broke higher. The area where volume appears to be greatest, which is the upper third of the most recent trading range, is known as the checkpoint. This identifies the price level where most of the transactions took place. For Wells Fargo, the checkpoint appears on the chart around the $ 50.50 price level.
The Wells Fargo share price recently closed above a thin area of bearish volume, highlighted by the red rectangle. From below this area, it would have acted as resistance. It is currently significant that Wells Fargo has exceeded this level. If the Wells Fargo stock price were to retrace and fall below this area, there is a thin area of bullish volume volume, highlighted by the green rectangle. This is a price point that could represent support if the Wells Fargo share price were to decline.
These support and resistance levels show a wide range of support and resistance for the price. As a result, it is possible that any news, surprisingly bad or surprisingly good, will surprise investors and could generate an unusually large movement. After the previous earnings announcement, Wells Fargo shares rose less than 1% the next day and started declining the following week. Investors can expect the same kind of small price movement after this announcement. With plenty of room in the volatility range, stock prices could rise or fall more than expected.
Look at the options
While the Wells Fargo recently moved out of a relatively wide trading range, it appears that options traders are positioning themselves for the stock price to continue to rise in the future. This is because recent trading volumes on Tuesday favored calls over puts at a ratio of nearly 2 to 1. Open interest for Wells Fargo has 1.2 million calls. against 1.1 million puts. While these numbers are very close, a more in-depth analysis of open interest rates and transaction volumes is compelling.
During the last five trading days, 72% of the options traded were call options. In addition, 86% of the notional value, or the total dollar amount, of all option contracts were call options. This represents a growing bullish outlook towards Wells Fargo.
For January 21, the next monthly options expiration date, it looks like options traders are placing big bullish bets on Wells Fargo. This is because for the money options and a two-way strike, the calls outnumber the bets by almost 8 to 1. Almost all of the open interest in these strikes comes from the. $ 55 call, with 35,000. This strike coincides almost exactly with the bottom of the bearish thin area near the top of the chart. This is important because if Wells Fargo comes up with a nasty profit surprise and that large number of bets unwind, it could put significant downward pressure on the stock.
There are significantly more out-of-the-money put options than call options. At first glance, this would seem incredibly bearish; however, the implied volatility of these options is declining, suggesting that more traders are contracting short positions on these options. It could be options traders selling positions to collect high premiums before profits while implied volatility is high. The fact that traders are more willing to sell puts than calls could mean that there is less fear of a significant downward movement after earnings.
As one of the flagship banking stocks, investors will be watching Wells Fargo earnings closely. The company has led a booming industry, and investors will be eager to see continued follow-up or a potential downside reversal. Options traders seem to take advantage of the high premiums due to the increase in the price of stocks before profits by selling puts, while continuing to buy calls.