Bank Stock Buy Signal Rarely Wrong

Subscribers to Chart of the Week received this commentary on Sunday, April 21.

There aren’t many constants on Wall Street, but one is bank stocks paving the way for the new cycle of quarterly reports. They always offer investors a sneak peek of what to expect each earnings season. One of the first to enter the ring is usually Charles Schwab (SCWH), which took a haircut back in January on the back of a disappointing fourth quarter whiff. This time around, the banking giant’s first-quarter earnings and revenue outpaced estimates, despite both figures declining sharply year-over-year.

Within two trading days of this beat, the equity climbed to a fresh annual high of $73.87. Now the stock sports a 36% year-over-year gain, ascending along long-term trendline that connects to its October post-earnings low. Longer term, SCHW’s share price remains significantly off its February 2022 record high of $96.24. That level could soon be back in the bank stock’s crosshairs, as a historic bull signal is flashing on Charles Schwab stock.

 

SCHW’s current short-term peak comes amid historically low implied volatility (IV), which has been a bullish combination for the stock in the past. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, there have been seven other times in the past five years when the stock was trading within 2% of its 52-week high, while its Schaeffer's Volatility Index (SVI) stood in the 20th percentile of its annual range or lower. This is now the case with SCHW's SVI of 25%, which sits in the low 1st percentile of its 12-month range.

White's data shows that one month after these signals, the security was higher, averaging a 3.2% return for that time period. From its current perch of $73.60, a move of similar proportions would put the stock near $76 per share -- levels not seen since early 2023.

Buying premium on the equity could be a boon for investors, as SCHW’s Schaeffer's Volatility Scorecard (SVS) stands at a high 86 out of 100, indicating the stock has exceeded option traders' volatility expectations in the past 12 months. If Wall Street continues to experience whipsaw price action on a day-to-day basis, safer plays are going to become more in vogue. Considering its market cap of $130 billion offers insulation from regional bank volatility – and with an encouraging earnings report now in tow – SCHW offers a type of low-risk comfort food for investors reminiscent of the bank stocks of old. The contrarian signals flashing above are just an added bonus.