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 trading revenues would decline 20% 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 Delta Desk Research Report can email Tim at timbiggam@gmail.com.
