JPM acts as a Technical Catalyst for the SPX
The surprising performance of financial institutions during the first quarter of 2012 was a leading contributor to the S&P 500® Index’s (SPX) strong start to the year (Figure 1.1). Therefore, it was no coincidence that once JP Morgan Chase’s (JPM) CEO Jamie Dimon revealed on Thursday afternoon, May 10, a CIO unit loss of at least $2 billion, the SPX lost financial sector leadership and struggled for the remainder of the second quarter (Figure 1.2).
Last week we highlighted the potential for this past Friday’s JPM earnings to act as a catalyst for the SPX, which despite the abundance of negative news over the past 100 days, remains firmly above its 200-day moving average (Figure 1.3) at 1307.51. Investors were not disappointed as the JPM earnings fulfilled expectations and led the SPX to a +1.65% gain on Friday. JPM itself rallied +5.96%.
Investors now have a favorable technical formation in place with an easily defined low risk point of reference to determine if further appreciation will be traced out in the coming critical earnings release weeks. Since June 4 the SPX has established a series of three rising troughs – June 4 @ 1266.74, June 25 @ 1309.27, and July 12 @ 1325.41. Investors should utilize this past Thursday’s 1325.41 low as a critical point of reference to determine the validity of Friday’s appreciation. Maintaining above 1325.41 suggests a likely challenge in the coming weeks to the May 4 breakdown level at 1391.51.
The fundamental interpretation of JPM’s results is a likely late third quarter or early fourth quarter resumption of the $15 billion share buyback program. Furthermore, as evidenced by JPM and Wells Fargo (WFC), which also reported Friday morning, the balance sheets of financial institutions continue to improve as expense management is a 2012 focus. Additionally, U.S. regional banks continue to enjoy strength in mortgage banking as the Home Affordable Refinance Program (HARP) will continue to act as a tailwind for the sector. Any opportunity to own the debt of these U.S. financial institutions continues to be suggested as one that investors should not pass on.
Figure 1.1 S&P 500 Index (SPX) Year To Date
Figure 1.2 JP Morgan Chase (JPM) Year To Date
Figure 1.3 S&P 500 Index (SPX) last 100 days