JPMorgan Chase (JPM) — This global money-center bank was once the apple of Wall Street’s post-financial-crisis eye. Unfortunately, the bank has hit a few speed bumps during the past few years — we all remember the London Whale and the billions of dollars JPM has had to pay to settle myriad lawsuits.
Interestingly, JPM’s stock price is still doing remarkably well. In fact, it’s time to stop stressing out about JPM’s past woes, because Jamie Dimon and the rest of the management team at the house that Morgan built are about to successfully navigate their way through the latest round of stress tests administered by the Federal Reserve.
On March 20, the Fed is scheduled to announce the results of its Comprehensive Capital Analysis and Review (CCAR) of 30 bank holding companies, including JPM. The Fed has said these institutions “will be evaluated to ensure they have sufficient capital to continue to lend to households and businesses even under stressful conditions.”
JPM should pass this evaluation with flying colors. In fact, the bank is likely to find that it has more capital on hand than it needs to continue to meet the Fed’s requirements. The question at that point will be, what should it do with all that extra capital?
Many analysts believe JPM is going to use it to reward shareholders by increasing its dividend and potentially adding funds to its share buyback program. If it does, watch for the stock to break through its recent January and March highs.
From a technical perspective, JPM has done a great job holding on to a steady uptrend since June 2012. After a sharp pullback in January, the stock has recovered and appears to be climbing in a solid uptrending channel.
Last week, shares attempted to break above their January high of $59.82, but weren’t quite able to sustain the move in the face of the broader market pullback. However, news of an increased dividend could be just what the doctor ordered for a resurgence of bullish momentum.
This trade may take a few weeks to fully develop. While the results of the stress test are scheduled to be released on Thursday, JPM may take a few days to announce any plans it has for the anticipated excess capital.
We recommend entering a position now on the support bounce and setting an initial stop loss below recent support at approximately $55.50. Set your first price target at $60, near the high reached on March 7, and your second price target near $62, in line with the uptrending resistance level of the current channel.
John Jagerson and Wade Hansen are the co-founders of LearningMarkets.com, a source for free investment education and daily analysis of the stock, options and Forex markets. Wade is the co-author of Profiting With Forex: The Most Effective Tools and Techniques for Trading Currencies (McGraw-Hill, 2006). John Jagerson has worked in the capital markets and private equity for most of his career, including investing, writing, education and money management. Together, John and Wade are the editors of Slingshot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get one free month today by clicking here.