Shares of JPMorgan Chase & Co. (NYSE:JPM) have been on a nice rally over the past week, moving higher by over 3% off the recent lows at the $88 level. Much of the recent rally is likely predicated of renewed hope of tax reform and a Dodd-Frank repeal, both of which still are in the formative stages at best. Hope, however, can only take a stock so far. Given the recent tepid outlook for JPM, I look for the stock to struggle to head appreciably higher.
At yesterday’s Barclay’s investor conference, JP Morgan CEO Jamie Dimon stated that in the third quarter of 2017 versus the same period a year prior.
This lowered outlook was worse than similar weakened projections made by Citigroup Inc (NYSE:C) and Bank of America Corp (NYSE:BAC
). It would also mark the biggest decline in Q3 trading revenues in six years. Goldman Sachs Group Inc (NYSE:GS) President and co-COO Harvey Schwartz said “It’s a pretty challenging environment for us” regarding third-quarter trading revenues. So certainly look for trading to contribute much less to earnings over the coming quarters.
Banks earn a large portion of their income from lending. Net Interest Margin (NIM) is a key metric and is benefited by higher interest rates, especially on the longer end of the curve. The chart below shows the correlation between the 10-year Treasury yield and JPM stock.
Normally highly correlated, JP Morgan stock is now trading at a big premium to the ten year yield. I look for that correlation to revert back to the mean, with JPM being a relative under-performer over the coming weeks.
From a technical analysis perspective, JPM has major resistance looming at the $94 level. Since stalling out at that level following the epic post-Donald-Trump election rally, JP Morgan shares have attempted on two occasions to break out, only to fail. I expect the $94 area will continue to be a formidable headwind for JPM stock.
So with JPM looking overextended on both a fundamental and technical viewpoint, a pullback is likely on the horizon. To position to profit in that environment. A bearish put diagonal spread makes sense.
JPM Trade Idea
Buy JPM Sep 29 $91 puts and sell JPM Sep 22 $90 puts for 65 cents net debit.
Ideally JPM closes near the $90 strike price on Sept. 22 expiration.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the can email Tim at timbiggam@gmail.com.
