Today is one of the first truly significant days of this earnings season, with four big names in the financial sector reporting this morning. The actual prints were somewhat mixed, with two beats, a miss and one roughly as expected. As I write this just before the opening, all four stocks are trading below yesterday’s closing levels. A drop on an earnings beat usually means one of two things: either there is something in the report other than the numbers causing the reaction, or it is happening for a reason unrelated to the results. Whatever the specific reason, a non-earnings-related drop following a decent report is usually an opportunity for investors.
The drop I'm looking at in particular is with JP Morgan (JPM). Is this an opportunity or should investors steer clear?
JP Morgan’s earnings beat looks great on the surface. But dig a little deeper, and it is a bit suspect. They posted EPS of $3.33 versus expectations for $3.01 on revenue of $30.35 billion versus $29.99 billion forecast. That sounds good, but it included $0.47 per share that came from a one-time credit for expected loan losses that didn’t materialize. Without that, they would have missed. Add in the reduced guidance contained in the report and the four percent or so decline in the stock in the premarket looks at least justified, if not underdone.
One could argue that lower-than-expected loan losses are a good thing. After all, the firm are writing off a lot less than they anticipated, which is money in the bank, and for clients to have better-than-expected financial health can’t be bad, right? The problem is that this is a one-off, and without it, Q4 was a pretty bad miss. Even that might not be too disastrous though, if it weren’t for the setup for the stock coming into the release.
JPM had come into this priced just about to perfection, having led the strong rally in bank stocks over the last month or so. That rally, however, has shown signs of stalling over the last couple of days, and two days of "turnaround doji" type candles will have had chart readers a bit worried. They are the last two, that look like crosses, and they often come just before a move reverses. The theory is they represent a battle between buyers and sellers that ultimately ends in a tie which, following a period when the bulls consistently had the upper hand, is an indication of a shift in power dynamics.
If that is a bit too technical and wonkish for you, there is another, more logical reason to worry about the chart. It shows that a lot of good news about the impact of rising rates this year is priced in, making the stock vulnerable should anything not work out as planned. And there is evidence this morning that the Fed’s decisions on that front may not be as clear cut as previously thought. Retail Sales for December missed in a big way as consumers felt the effects of rising prices, which, if it becomes a trend rather than a one-off, would put the Fed in a bit of a bind. Raising rates would slow those price increases, but if the rate hikes hit a weak economy as consumers cut back, they could slow things to an actual stop.
With JPM, we have a situation where a beat was not quite a beat, forward guidance has been reduced, the chart is flashing warning signs, and the assumption that has lent so much support to the stock over the last month is now a bit questionable, both as to whether it will happen or not, and what its material impact will end up being. To me, that says that the drop in JPM this morning is anything but an opportunity. It may well be the start of a real reversal in a stock that is best left alone.
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