MorningWord 10/11/13: Financial stocks have been struggling relative to the broader market for a couple months now. Yesterday’s rally was the first welcome hint of leadership from the sector in quite a while. The XLF/SPY ratio shows the under-performance:
JPM and WFC both reported earnings this morning, and the results were decent. For JPM, market participants are clearly looking past the huge legal losses, in the hopes that this settlement finally gets the prosecution monkey off the company’s back. The underlying business was ok, though the bank is still struggling to grow revenues (down 8% year-over-year). The mortgage banking decline was the biggest hit.
A similar story for WFC. The bottom line was a beat, but revenues missed, again due to weak mortgage banking. Here’s the problem – banks can manipulate reserve releases or a number of accounting items to meet the earnings numbers. The revenue numbers are cleaner. The market wants to see revenue growth, and that’s a tougher proposition given the rise in rates we’ve seen in the last few months.
What about the reaction coming out of earnings? JPM is currently up about 1% while WFC is down 2%. Here is what Enis wrote in his trade post about JPM a week ago:
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.
Both JPM and WFC rallied 3% over the past 2 days. If history holds true, selling the bounce might be the prudent strategy for the weeks to come.