New Trade – $JPM To The Death Cross

by Dan March 13, 2015 1:30 pm • Commentary

Yesterday I highlighted the relative under-performance of Bank Of America (BAC) to its moneycenter bank peers Citibank (C) and JP Morgan (JPM) given the company’s second consecutive request to resubmit their capital return plan following the Fed’s stress tests. I also highlighted a technical formation known as the “death cross” where the 50 day moving average crosses below the 200 day moving average suggesting waning short term momentum (below).

Well BAC ain’t alone, and despite JPM’s 3% gains yesterday, the stock is also making a “death cross” (circled below):

JPM 1yr chart from Bloomberg
JPM 1yr chart from Bloomberg

While JPM’s capital return plan was approved, the 4 cent quarterly raise to its dividend and the $6.4 billion share buyback might not have been as large as some investors were hoping.  The share buyback will start April 1st and run through Q2 2016.

Increased share-buybacks will certainly be welcomed by shareholders, but the next leg for bank stocks will be a rise in interest rates aiding their net interest margins that have been declining during the Fed’s policy of ZIRP (read a solid description of the effects of low rates on banks NIMs from Forbes here).

Soooo, the Fed meets on Wednesday, and with Fed watchers like the WSJ’s Jon Hilsenrath are penning stories like this Fed Likely to Remove ‘Patient’ Barrier for Rate Increase as Soon as June.  What that means, per Hilsenrath:

The Federal Reserve is strongly considering removing a barrier to raising short-term interest rates as early as June by dropping its promise to be “patient” before acting.

And here is the kicker (emphasis mine):

Fed Chairwoman Janet Yellen has said the patience promise means the Fed won’t raise rates at the next two policy meetings. Thus, if the Fed removes “patient” next week, it would open the door to a discussion about a rate increase at its June meeting.

If the Fed does remove the word patient from their rate statement’s text then it should already be in the market. If they don’t then conversely it will suggest that the Fed will remain dovish as they remain concerned of the pace of the recovery and the potential damage that could be done from moving too soon, or have the market anticipate higher rates sooner than the Fed would hope…

Either way, I think banks stocks are a short here.  While I am inclined to pick on stocks like BAC that have been massive laggards, it’s important to note that JPM Q4 results on Jan 14th were less than stellar, and the stock declined 3.5%.  I suspect Q1 results will be equally poor, and the buyback will not likely kick in in earnest until after the blackout period around earnings expected April 14th. So in the interim I want to make a defined risk bearish trade that the stock retraces half of the recent move.

TRADE:  JPM ($60.55) Buy to April 60/55 Put Spread for 1.20

-Buy 1 April 60 put for 1.55

-Sell 1 April 55 puts at .35

Break-Even on April Expiration:

Profits: between 58.80 and 55 make up to 3.80 with max gain of 3.80 at 55 or below

Losses: up to 1.20 between 58.80 and 60 with max loss of 1.20 at 60 or higher.

Rationale: This structure targets a break below this week’s lows and positions for a possible move towards the lows of the year. Earnings should keep implied vol bid which protects the structure a little on decay despite it being out of the money. The trade is about 33 short deltas at initiation but the 60 strike isn’t too far and any break below that level really get’s this thing going with a breakeven a dollar and change below that.




Original Post March 12th, 2015: Chart of the Day – $BAC To The Death Cross

Bank of America (BAC) is seeing red today as their capital return plan got a “conditional pass” having to resubmit for the second straight year.   On a day that the S&P 500 is up more than 1% and moneycenter bank stocks like Citibank and JP Morgan are up 2% and 3% respectively and investment banks Goldman Sachs and Morgan Stanley are up 3% and 6% respectively, BAC’s under-performance sticks out like a sore thumb.

And it’s not just today’s action. The chart just made a “death cross” with its 50 day moving average crossing below its 200 day moving average, depicting waning near term momentum:

[caption id="attachment_51912" align="aligncenter" width="600"]BAC 1yr chart from Bloomberg BAC 1yr chart from Bloomberg[/caption]

While we rarely ever trade just on a technical input, this one has been good to us.

GOOGL from November (New Trade – Frugal $GOOGL):

The inability of GOOGL to keep pace with the broad market is the key, with the stock sitting flat on the year and 9% off of the 52 week highs that were made more than 8 months ago. Additionally, the declining momentum is about to manifest itself with what some technicians call the “Death Cross” where the shorter moving average, in this case the 50 day (purple below), is about to cross to the downside of a longer term moving average, in this case the 200 day (yellow below):

GOOGL 1yr chart from Bloomberg

There’s not much scientific data as to the significance of the “Death Cross” so I don’t want to put too much emphasis on it (good recent discussion here from, but it indicates a loss of momentum and there was an example in the last couple months that got a lot of attention as small caps, measured by the IWM, saw a nearly 10% decline following the cross:

IWM 6 month chart from Bloomberg

And then in MSFT 2 weeks ago which the impending formation helped me get out of a winning trade before it would have turned into a quick loser, from February 27th (here):

A couple weeks ago we made a defined risk trade that MSFT would follow a few other large cap tech stocks in an effort to fill in their lower earnings gaps as broad market sentiment improved. MSFT has rallied close to 10% from its post earnings lows, and nearly 2.5% from where we entered the trade (below) but has lost a bit of momentum at the $44 level, and is potentially making a troubling technical formation called a death cross (the 50 day moving average crossing below the 200 day):

MSFT 6 month chart from Bloomberg

The waning momentum off of the stock’s lows, the weak results and price action from large enterprise vendor HPQ this week, and the impending death cross have me looking the other way on MSFT all of a sudden (a short biased trade could be coming).

So here is the thing, there is an obvious confirmation bias here, and I am sure there are far more examples of where this cross occurred and the stocks did not fall off of a cliff, but I have merely used the formation as input into a broader thesis.  If BAC can’t get going, and the Fed’s statement next Wednesday remains dovish then banks could be a sale, and for the traders out there we all know that its generally a better strategy to short weakness as opposed to strength. So I’ll keep an eye on BAC as the one to target in an around the Fed meeting if it feels like banks are a good entry on the short side.