New Trade $JPM – Dimon Mining

by Enis October 4, 2013 10:03 am • Commentary

We played JPM for a quick bounce off the important $50 technical support level last week.  Now with earnings approaching next Friday, Oct. 11th, the stock has our interest again, particularly given the historical setup for JPM into and after earnings.

First, the technicals show the continuing importance of the $50 level:

JPM daily, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
JPM daily, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

The recent bounce off of $50 also coincided with the 200 day ma as well.  The declining 50 day moving average comes into play around $53.

As for this quarter’s earnings, JPM analysts have actually lowered the bar quite a bit over the last month.  The Q3 earnings consensus estimate is now $1.33, vs. $1.46 for the same quarter last year, and $1.57 and $1.54 that JPM earned in Q1 and Q2 of 2013.

In that sense, it seems like another set-up where JPM can walk over the lowered bar, even with the dropoff in the mortgage market, decreased trading revenues (as detailed by Deutsche Bank last week), and the legal costs that continue to mount.  But how has JPM historically behaved before and after earnings results over the past 4 years?  

JPM has been a classic case of a stock that rallies into earnings, and then sells off on bad news.  It has consistently done this since early 2010, and I view JPM’s strength over the last week as indicative of a similar setup.  Traders are well aware of the low bar, and JPM management’s ability to move accounting levers (such as loan loss reserve releases) to meet or beat analyst estimates.  So I do think JPM is likely to beat the earnings estimate, but I also think the reaction to that result could actually be a lower stock price.

Here’s the other issue – going forward, all those problems that have caused analyst estimates to move lower will persist, with the possible exception of the legal issues, though even that’s debatable.  The real reason U.S. financial stocks have underperformed the market over the last month is that investment banking results and mortgage banking results, the 2 big divisions for a bank like JPM, show signs of deterioration rather than acceleration.

Finally, the technical setup is one that shows JPM moving higher into a declining 50 day moving average, and I think the buyers might have exhausted themselves defending the $50 level on this last push higher.  This structure plays for a rangebound situation into earnings on Friday, and then lower prices in the following 2 weeks:

TRADE: JPM ($52.24) Bought Oct25th 52.5 / Oct11th 51.5 Put Diagonal for $0.82

-Bought 1 Oct25th 52.5 Put for 1.47

-Sold 1 Oct11th 51.5 Put at 0.65


This trade is similar to a put calendar, but with different strikes, as we want a bit of short delta given that JPM is closer to 53 than to 50. Ideally, JPM ends next Friday at 51.5, and the Oct 11th 51.5 put expires worthless, and we are long the Oct25th 52.5 put for 0.80.

Trade Rationale:  We like this structure because we don’t expect a big negative reaction following JPM’s earnings on Friday, but we also think the broad forces and technical setup speak to a stock that is likely headed lower in the next few weeks.  Moreover, this structure won’t lose much value over the next week as long as JPM does not make a major move higher, which we view as unlikely given the overhead supply.