Event: JPM reports its fiscal Q4 earnings on Tuesday, January 14th before the open. The options market is implying about a 2.5% one day move, which is above both the 4 qtr avg of only about 1.5% and the 8 qtr avg of about 2%.
Sentiment: Wall Street analysts are generally positive on the stock, with 31 Buys, 10 Holds and 2 Sells, with an average 12 month price target of around $63.50. JPM has almost doubled over the past 18 months, since the stock’s low just above $30 after the London Whale bust in mid-2012.
Options Open Interest: Open interest is skewed to puts by a ratio of almost 1.5 to 1, though much of the put open interest is far below the current stock price. In contrast, 1 month volumes are significantly skewed towards calls, with almost 100k calls per day trading vs. 20k puts per day over the past month. The Jan18th 60 call strike has over 60k of open interest, the most of any near-term maturity. Farther out, the Jan15 62.5 call strike has over 30k of open interest, and the Jan15 50 put strike has nearly 20k.
Price Action / Technicals: JPM is trading at its highest level since the year 2000, when it registered its all-time high of $67.17. JPM’s high so far in 2014 is $59.47, above which there is no meaningful resistance until the psychologically important all-time high. The stock broke longer-term resistance around $50 in 2013, and held that breakout on several tests in the summer and fall:
The stock’s shorter-term daily picture indicates initial support at the rising 50 day moving average around $56.25, and more important support at the rising 200 day moving average around $53.25 (JPM has not traded below its 200 day ma for more than a day since August 2012):
Volatility: JPM implied volatility is only at the midpoint of its 1 year range, despite the earnings event tomorrow:
The stock has moved 1% or less on the past 4 earnings reports, so traders have reduced their volatility expectations this time around. Implied volatility is likely to fall into the mid-teens if earnings is once again a non-event.
Our View: JPM price action has been quite strong into the event. JPM almost always beats the headline expectations given the room for accounting interpretation for large banks, so investors are likely to be most focused on overall revenues and guidance for the first half of 2014. Analysts have modeled in a lower Q4 in 2013 vs. 2012 for JPM, and for the other global investment banks in the U.S., with the exception of C.
Given that lowered bar, and the high expectations, the likelihood of a big move to the upside seems relatively limited. The stock has moved lower by 0-1% on the past 3 earnings reports, afar beating expectations on the headline number each time. In that sense, the reaction to the earnings number will likely be more telling about market positioning and overall investor demand for the shares, rather than a new interpretation about the underlying business.