Too big to flail

April 18, 2016 04:00 PM

The Ides of March strikes the banking sector, thanks to a fateful announcement from the Federal Reserve. 

It seems everyone but bankers cheered the Fed’s decision to defer interest rate hikes in March. 
Bank stocks took a beating after Fed Chair Janet Yellen hinted that interest rates might hold steady through 2016, deflating expectations of three, possibly four rate hikes in the quarters ahead. The news came at a sensitive time for the industry, which was already struggling to claw back loans from energy companies and warning of poor returns from their trading desks. 

Bad news comes in threes, it seems — or maybe it comes in fours, sixes or 10s. At Eidosearch, we don’t care much for superstitious sayings. We just read the historical data for the likelihood of a rebound. Judging from stocks that have taken a similar beating in the past, the banking sector may not be out of the woods just yet.

We used our pattern matching software to identify stock movements throughout history that follow the same movements of bank stocks today. So what happened to these historic stocks one year out? The majority kept sliding. We project negative returns for seven out of 11 global banks where we found a 
sufficient number of precedents for forecasting. You can find them sorted by returns, or lack thereof, in “Bank holiday” (below). 

When you reached the bottom of the table, you probably ask yourself, “What on earth happened to Bank of America?” Indeed, it’s an outlier among the bank stocks, the only one projected to decline by double digits, and the range of outcomes skews heavily toward the downside (see “Bad pattern for BAC,” below). 

But probe deeper into Bank of America’s history, and you’ll find that it is indeed an outlier — and not in the way you’d expect. Yes, other stocks faced with a similar dip in valuation tend to keep falling one year out. But Bank of America is not quite like other stocks. We found four historical instances in which Bank of America suffered a slide much as it has today, and unlike other stocks, it rebounded every time, with returns of 27% to 42% in the following year. 

“On second look” (below) shows the returns one year after each of the matched periods. 
Perhaps Bank of America is in a category unto itself: Too big to flail. It’s a contrarian notion given the stock’s turbulent path, and the bleak outlook of the industry as a whole. Then again, that’s the value of pattern matching — it brings insights that force you to question conventional wisdom and break your own patterns of thought.

About the Author

Dr. Steven Zhang is the CEO at EidoSearch.com, a  Ph.D. in electronic engineering and an internationally renowned expert in information processing technologies. His expertise is in the areas of signal processing, multimedia content analysis, computational intelligence, pattern classification, as well as, applications in bioinformatics and finance. 
@EidoSearch