Unusual Stock Options Volume Signals Concerns for Ally Financial (ALLY)

“No losses will be borne by the taxpayers.” That’s the message President Joe Biden issued to the American public amid the failures of two major financial institutions. Despite the strong commitment to undergirding the stability of the monetary system, investors nevertheless took a dim view of banking firms, particularly Ally Financial (ALLY). Suddenly, what looked like a promising setup for ALLY stock rudely evaporated, leaving stakeholders rushing for cover.

As Barchart contributor Rich Asplund mentioned on Friday, U.S. regulators closed Silicon Valley Bank, becoming the biggest U.S. bank to fail since 2008. Asplund noted that the California Department of Financial Protection and Innovation took possession of the beleaguered institution and appointed the Federal Deposit Insurance Corp. (FDIC) as a receiver, citing inadequate liquidity and insolvency.

Over the weekend, Signature Bank also failed, with the New York Division of Financial Services taking over the firm on Sunday and assigning control to the FDIC. In particular, Signature catered to cryptocurrency holders, likely raising the bank’s risk profile. As news of the two financial firms’ implosion spread, investors (perhaps wisely) sold off exposure to banking shares, including ALLY stock.

While depositors will be made whole in this fiasco, shareholders and certain unsecured debtholders will not be protected. Therefore, unless one has absolute confidence that this panicked state will blow over, no real need exists to suffer exposure to this now-toxic sector.

Adding to troubles for ALLY stock, options traders may have received the memo. Following the close of the March 13 session, Ally captured the spotlight of unusual stock options volume. Specifically, volume hit 164,597 contracts against an open interest reading of 377,828. The delta between the Monday session volume and the trailing one-month average volume came out to 470.78%. Moreover, put volume at 132,729 dwarfed call volume of 31,868.

Moving forward, investors will probably want to steer clear of ALLY stock for these three reasons.

ALLY Stock May Suffer From Job Losses

Primarily, the main concern for ALLY stock centers on mass layoffs. While the underlying enterprise itself can issue pink slips to its employees, the greater risk centers on layoffs that extend beyond the technology sector. True, the economy presently enjoys a robust labor market. However, all good things must eventually come to an end – and this banking crisis could be the negative catalyst.

Setting aside the granularity of the individual bank failures, at the core of the underlying cause – a run on banks – sits a deflationary headwind. By the masses seeking to pull money away from financial institutions, the inherent action is deflationary; that is, fewer units of currency are available for lending and other forms of distribution.

Compounding matters is that the velocity of M2 money stock – despite accelerating sharply in 2022 – remains near all-time recorded lows. Therefore, the collective desire to pull money out of the banks may crater this velocity metric. If so, the subsequent deflationary dynamic may hit the economy, sparking job losses.

From there, Ally won’t be able to make money from home mortgages and car loans, which would be a killer for ALLY stock.

Benchmark Interest Rates May Continue Rising

Invariably, when the government stepped in to fill the gaps of a fissuring financial system, the Federal Reserve effectively opened its balance sheet, an inflationary tactic. This of course contradicts the central bank’s commitment to tackling historically high inflation. Still, some analysts might argue that saving the stability of the monetary paradigm is more important than addressing rising consumer prices.

Nevertheless, other analysts believe that the Fed will continue raising rates, viewing the latest incidents as more of a hiccup rather than a paradigm-shattering break. Indeed, with the labor market (so far) turning in red-hot numbers month after month, monetary policymakers have some cushion to work with. In other words, they’ll be cooling the labor market from an extremely high point rather than a low point.

Still, if the goal of higher rates is to curb inflation, job losses will eventually come, as stated earlier. And that’s probably not going to bode well for ALLY stock.

No Turning Back

To be sure, it’s not guaranteed that the Fed will raise interest rates. It’s quite possible that, given recent events, the central bank may prioritize financial system stability over all other concerns. However, reversing course may yield serious unforeseen consequences.

As Fed critics noted earlier, policymakers can’t just aggressively raise benchmark rates and not break something. However, by reacting to the recent bank failures and going the other direction, something else can also break.

Further, an inflationary policy would likely spark substantial pain for the wider economy. Worse yet, such dovishness might not even save beleaguered enterprises. For instance, both stocks and especially cryptos suffered badly throughout the inflationary shock of 2022. Even more telling, blockchain assets failed to be a hedge against rising prices.

Therefore, don’t look to an accommodative policy to help ALLY stock. After kicking the can down the road for years, we just might have to eat this one.

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