Both JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS) reported earnings on Wednesday with significant positive surprises. We care about the reports from the big financial firms because they tend to be a leading indicator for the market at large. If the big banks are making more money we assume that economic activity is stronger in general. The news this morning wasn’t followed by a big breakout in either stock which is a small concern, but may have more to do with the run that both stocks already experienced prior to this quarter’s report.
The big money-center banks have run up significantly since the post-election draw down. The rally led the subsequent breakout in the major indexes following the fiscal cliff deal at the first of the year. This reflected a rising level of confidence that the news would be better than average estimates. It is important to remember that although “official” analysts’ estimates were beaten handily, the unofficial or “whisper” numbers were beaten by a much smaller amount, which may help to explain why both stocks finished trading with under-5% gains.
The whisper numbers reflect the updated view of analysts for a given company’s earnings report that is not reflected in the most recently published estimates. These numbers generally come from conversations with analysts that may not always be public. It’s perfectly legal but it’s not always easy for individuals to get access to the same information. Sometimes they will pop up in the news and there are a few online services that will aggregate info like this but they are not always very reliable.
Click to EnlargeMost often, the real expectation is only clear after the report, when traders have an opportunity to make a trade based on whether the company performed at or above their real expectations. If we assume that the reaction to JPM and GS represents an “at expectation” result then we start to get a little more concerned about the potential for a decline in the near term. As you can see in the chart, while JPM ran up in anticipation of the report, the stock is currently at long-term resistance. This is where the stock has sold off each year over the last 5 years (except 2009).
We don’t expect any significant selling in the near term, but if the 5-year pattern continues then selling would be expected at the end of this quarter. This price history is not extensive enough to make firm estimates about the market’s potential but it will be on our radar screen nonetheless. If selling does start now that investors are sitting on significant profits, it would still be a strong indication that the rest of the market will follow.
At SlingShot Trader we watch bellwethers like JPM and GS closely as a way to make sure we are trading on the right side of the market. The recent relative strength in these stocks is a good sign and is one of the reasons why we have been adding more bullish positions lately. However, resistance remains in play on the broad indexes as well as individual stocks like JPM. That means we need to be cautious about getting too overweight to the upside.
John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.