Will JP Morgan Lead Banking Stocks Lower?

The chart of JPM below mirrors that of the banking sector ETF, XLF. A tremendous rally off of the Trump election, enough to create a very overbought condition closing out 2016.  Since that point, it attempted to rally after a small pullback and actually reached new yearly highs in March.  But on that push, negative momentum was formed and the stock has been grinding lower ever since. As you can see JPM has gone nowhere (dead money) for the past 6 months and has formed a bearish head and shoulders reversal pattern.  If the pattern were to play out its target is labeled T1 on the chart some 12% below todays close. T2 is a support level of significance if T1 does not stick and the market continues to sells off.

As investors in any region of the world, we always want to see banking stocks in healthy up-trends, making higher highs. While JPM’s price is still above a rising 200 day moving average, it formed a new intermediate term lower high and lower low warning of a potential trend reversal. Any play out of the bearish head and shoulders pattern would make huge dent in the bullish case for banking stocks. 

As goes JPM, so goes the banking sector.

It’s important to know that head and shoulders patterns which are over-hyped up by the financial media’s lack of understanding of technical analysis and constant need for headlines. When these patterns do actually play out they are a thing of beauty and can be quite profitable for those short. But the fact is these pattern either don’t materialize or fail the majority of the time. Why? its because historically stocks have spent 70-80% of the time either moving sideways or higher and this pattern is a marker for stocks moving down. Back to JPM, from a purely mathematical standpoint we have higher statistical probabilities a decline will NOT materialize. Nevertheless whenever these patterns develop they should not be ignored as they are a warning sign and we need to be concerned just in case it turns out to be one of those 20-30% possibilities.

Blockbuster or a Flop?

US bank stocks went on a tear after the Trump election. The promise of a pro-growth agenda combined with higher rates the FED was proclaiming set up an ideal environment for them to prosper and roll in the dough. Unfortunately, the promises and proclamations ran into political reality and as such that ideal environment is becoming a distant memory.  As you can see in my chart of the US bank sector ETF, XLF, below, banks ripped higher, topped and are close to breaking down out of a very symmetrical and almost ideal head and shoulders (topping) pattern. A breakdown below the blue horizontal neckline and hold, points to a downside target at, T1.  Since there is little support at that level, it is likely if T1 is hit, they continue lower down to the T2 zone as that is a level of major support.

On the flip side, some European banks which, many were on the precipice of default and setting up the potential for another 2008 banking-type crisis, look exactly like the US banks.  Except upside down.  A good example of this is represented in the chart of Deutsche Bank, DB, below. Like their US brothers, they have not broken out of their almost symmetrically ideal (inverse) head and shoulders (bottoming) pattern. A break and hold above the blue horizontal neckline points to an upside target at T1, some 40% higher. If it really has some legs and slices right through T1, the T2 zone represents a level of major resistance where it will likely struggle as supply is likely plentiful. I find this situation unique and interesting as investors are potentially setting their sights on Europe.  If so, this would be a major fundamental shift.

Patterns in development are nothing but a potential setup for a future investment.  Until either one of these confirms they should be viewed only as you would a trailer to an upcoming movie. Something to grab your interest but sometimes turn out to be the highlights of a studio flop.

$60 Trillion of World Debt

I saw this chart posted by visualcapitalist.com and had to forward it along. While it has little to do with investing, it is an obsession of mine. I am a firm believer that one day we will have to face the piper and have our day of reckoning.  While debt isn’t evil, the level of debt we (the US) have almost fits that description. But the interesting thing is, and maybe provides some solace, is looking across the global landscape it appears as if there are a few countries/regions that may have to face the piper before we do. Ultimately though, our day will come.

As you can see the chart breaks down $59.7 trillion of world debt by country, as well as highlights each country’s debt-to-GDP ratio using color. The data comes from the IMF and only covers public government debt. It excludes the debt of country’s citizens and businesses, as well as unfunded liabilities which are not yet technically incurred yet. All figures are based in USDollars.

The numbers that stand out the most, especially when comparing to the previous world economy graphic:

• The United States constitutes 23.3% of the world economy but 29.1% of world debt. It’s debt-to-GDP ratio is 103.4% using IMF figures.
• Japan makes up only 6.18% of total economic production, but has amounted 19.99% of global debt.
• China, the world’s second largest economy (and largest by other measures), accounts for 13.9% of production. They only have 6.25% of world debt and a debt-to-GDP ratio of 39.4%.
• 7 of the 15 countries with the most total debt are European. Together, excluding Russia, the European continent holds over 26% of total world debt.
• Combining the debt of the United States, Japan, and Europe together accounts for 75% of total global debt.  Yet, combining their population they account for less than 25% of the world’s total humans

An All Clear (intermediate term) Signal for Bonds?

The US 30 year long bond peaked in July of last year and the combination of FED threats of multiple (4) interest rate increases and the Trump pro-growth election agenda had the effect of a proverbial “rug pull” out from under US bond prices. In 9 months the T-bond lost 17% (a huge amount for a so called “safe” investment) and shocked many investors as losses piled up.

It seems like political reality has finally set in, and the expectations for a FED rate increase next month is now down to just above 4%. Combine that with the fact that smart money (commercial interest) piled into bonds and are now at multi-year highs in their Treasury bond holdings provides all the reasons why we see bond prices bottoming, reversing course and moving higher. Price broke out of a double bottom pattern earlier this week and was precluded by an oversold divergent low, a high probability “buy-me” signal.  The pattern will be confirmed by a hold above the red horizontal breakout level.

If this pattern plays out, it projects to a rally up to the very important support/resistance zone marked T1. Coincidently (and should not come as a surprise) it comes at a time that retail bond investors turned overly bearish (a theme we see repeated over and over in investing – retail investors being on the wrong side of the trade).  As always after a major correction, investors patience will be tested as only time will tell if this reversal goes on to eventually form a lower high or instead on to make new highs. Until that is determined, it appears as if the market is giving the “all clear” signal to be long US T-bonds and because the institutions are buying again, at the same time their appetite for equities is weakening

March 2017 Charts on the Move Video

The quarter went in like a lion and out like a lamb.  A quick look back at Q1 market action and a deeper look at momentum divergences and how they can help your investing can be viewed in my latest video at the link below

https://youtu.be/reXa5MLO1Hk