Chart of the Day: $DB – Nicht Gut

by Dan May 19, 2015 11:44 am • Chart of the Day• Commentary

European stocks are partying today on news from an ECB executive board member that they will “front load” bond purchases in May and June in front of what they expect to be poor liquidity in the summer months.  The Euro Stoxx 50 (SX5E) is up 2.2% and the Euro Stoxx Bank Index (SX7E) is up 1.7%.

Over on this side of the pond our banks are the best performing sector in the S&P 500 on the day, likely a reaction to the move in bond yields after the better than expected Housing Starts data.  

There is one bank though that has not participated in the strength in either region, and that is Deutsche Bank.  Despite being up 9% on the year, the stock is also down 9% from the ytd highs made in early April.  From a purely technical standpoint, the stock could be forming a head and shoulders top, with the recent bounce off of the May lows forming the right shoulder:

[caption id="attachment_53779" align="aligncenter" width="600"]DB 1yr chart from Bloomberg DB 1yr chart from Bloomberg[/caption]

To state the obvious, a break to the downside below the neckline would be nicht gut.  With ECB QE in full effect we have seen options premiums in Europe get squished, just as we have in the U.S.  Short dated options prices are low, with 30 day at the money implied vol  (blue line) slightly below that of realized vol (white line), making short dated directional trades mildly palatable for those looking to express a view or possibly for protection:

[caption id="attachment_53780" align="aligncenter" width="600"]DB 1yr realized vol (blue) vs realized vol  (white) from Bloomberg DB 1yr realized vol (blue) vs realized vol (white) from Bloomberg[/caption]

European banks don’t seem worried about Greece’s perpetual payment crisis.