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bac

There has been some volatility in BAC today and that has provided a trading opportunity that I will place tomorrow. I still have to the May expiration, so still time to capitalise on this volatility.

Just when investors in Bank of America (NYSE: BAC ) thought things couldn’t get any worse, they just did. Less than a week after the government was reported to be seeking $13 billion from the Charlotte-based bank, investors learned that its recent and much-anticipated dividend increase will stay just that — much anticipated. News of the retraction sent shares tumbling. The stock ended down over 6% — its worst day since November 7, 2012.

On Monday, Bank of America said it uncovered a mistake in the way it valued debt instruments inherited in its 2009 acquisition of Merrill Lynch. According to the bank’s official explanation, “the company discovered an incorrect adjustment being applied in the determination of regulatory capital related to the application of the fair value option to certain legacy Merrill Lynch structured notes resulting in an overstatement of its regulatory capital amounts and ratios.”

The net effect is Bank of America must revise its regulatory capital ratios and resubmit its 2014 capital plan to the Federal Reserve before going forward with its previously announced dividend hike and share buyback program. In short, it means the bank has less high-quality capital than previously reported.

For Bank of America shareholders, the news comes on the heels of two other recent developments that have weighed on its stock price. Two weeks ago, investors learned that it set aside $2.4 billion in legal reserves during the first three months of the year. The announcement, disclosed in materials from its first-quarter earnings, ignited rumors that Bank of America is on the verge of settling a long-simmering dispute with Ambac Financial Group over mortgage-backed securities dating to the financial crisis.

And last week, media reports revealed that the government is seeking as much as $13 billion in damages from the bank stemming from the origination and sale of toxic mortgages in the lead-up to the crisis. Notably, this is in addition to the $9.5 billion settlement that Bank of America reached with the Federal Housing Finance Agency earlier this year. Once completed, in turn, these deals will add to a shockingly long list of misdeeds that the nation’s second largest bank by assets has been forced to atone for since acquiring Countrywide Financial and Merrill Lynch in 2008 and 2009, respectively.

We’ve seen some very interesting developments out of Bank of America lately. A month ago I put out a note about why I saw a great shorting opportunity in $BAC. It’s been a long time since I’ve received so much hate mail. Looks like I really hit a sensitive spot with this one. I learned early on that when so many people get offended, and so many of them disagree with such anger, I’m usually on to something. So far this is proving itself out well.

I still hate this name and I think bottom fishing in Bank of America is a terrible idea. First of all, Financials as a group continue their streak of underperformance. $XLF for example peaked relative to the rest of the stock market last July. This has been a serial underperformer for almost an entire year, regardless of what the permabulls might tell you. In fact, since mid-July last year, Financials are the worst performing sector in the United States of America.

So here is why I still hate BofA. Gaps lower on weekly charts scare the heck out of me. I take gaps on weekly charts a lot more seriously than those on daily charts, especially in such a liquid name like $BAC. These occurrences are rare. Look how bad this looks as the stock breaks a key uptrend line:

Now look at this thing on a relative basis. As prices made new highs in early March, momentum was already rolling over. That new high in relative strength turned out to be a text book failed breakout and now we’re seeing the results. Relative strength is also breaking a key uptrend line confirming what we’re seeing in the absolute price.

It looks to me like shares of Bank of America have a lot more downside to go. This is a terrible sector that the permabulls absolutely love. One of the most fascinating things to watch was all of the permabulls bottom fishing banks all the way down to zero throughout 2008. I learned so much that year watching other people getting crushed. I think we could see something similar. Maybe not an epic market crash like 2008, but shares of $BAC could see 12.50-13 very easily. And they can go a lot lower than that. This was a $5 stock 2 years ago.

Look out below. This is one we want to keep fading. I’ll keep you guys posted on the hate mail and I’ll let you know if it slows down. This call got people very angry. When they give up and finally admit they’re wrong, that’s when it’s time to cover. I don’t think we’re anywhere near there yet.

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