Shares of JP Morgan Chase (NYSE:JPM) look to have finally found some footing after a recent rout. JPM stock had fallen over 10% from the recent Sept. 14 high of $103.46 before bouncing off support at the $90 area. Some of the drop was undoubtedly warranted, given the previous strong rally. The selling has now come too far, too fast however. Time to position to be a buyer on any further weakness.
JPM is one of the few stocks still trading at reasonable valuation multiples on an historic basis. Trailing price-earnings (P/E) stands at just 12.4 while price-sales (P/S) is at just 2.44. Both of these widely followed metrics are at recent lows and also at significant discounts to their five-year averages.
Contrast that to the historically high 28.67 P/E ratio for the S&P 500. J.P. Morgan looks pretty attractive on a comparative valuation basis to both itself and also the overall market.
The technicals point to a bottom being formed in JPM stock. The 9-day RSI reached the lowest levels since the Covid-19 crisis lows before strengthening. MACD also got to a recent extreme before turning higher. Bollinger Percent B went negative, but has since gone back positive.
Previous instances when these indicators aligned in a similar fashion marked significant short term lows in JPM stock.
JPM Stock Charts
Source: The Thinkorswim® platform from TD Ameritrade
More importantly, shares once again held the major support area at $90 after piercing both the uptrend line and 20-day moving average. A move back to the trend line and 20-day moving average area appears the most likely course given the recent strength in JPM stock.
JP Morgan is normally fairly well correlated to the overall market, as seen in the comparison chart below. Lately, however, that correlation has broken down considerably. JPM stock is now trading at a huge comparative discount to the S&P 500. Since the Covid-19 crisis lows in early March, the S&P 500 has gained over 40% while JPM stock has tacked on only 15%. Look for this big divergence to begin to converge with JPM stock being a relative out-performer to the broader market.
Source: StockCharts.com
JPM stock is entering into a seasonally bullish period. October has been a positive month 75% of the time over the past 20 years with an average gain of 3.8%. While 2020 is undoubtedly a year like no other, having a seasonal edge should at least provide a probabilistic tailwind for JPM stock. That is never a bad thing.
The dividend yield on JPM now stands at a very healthy 3.8% with only a 60% payout ratio. The yield is now more than double the 1.7% yield on the S&P 500, which should begin to attract income investors. This should serve to provide a floor in JPM stock on any further weakness.
Earnings are due Oct. 13 before the market opens, with expectations for $1.89 in EPS on $27.84 billion in revenues. The whisper number, or what analysts really expect, is for $1.99 in earnings.
Rather than buying the shares now and having to deal with earnings risk, selling a short-term bull put spread makes better sense.
How to Trade JPM Stock
Sell the JPM Oct 9 $85/$90 put spread for 50-cent net credit
Maximum gain on the trade is $50 per spread. Maximum risk is $450 per spread. Return on risk is 11.11%. The short $90 strike is right at major support and provides a 5.62% downside cushion to the $95.35 Tuesday closing price for JPM stock. The bull put spread expires Oct. 9, which is before the Oct. 13 earnings release. This eliminates any earnings-related risk to the trade.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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