Wells on Notice (WFC)

by Dan July 12, 2018 1:29 pm • Trade Ideas

Tomorrow before the open Citigroup (C), J.P. Morgan (JPM) and Wells Fargo (WFC) will all report their Q2 earnings. Here are the one-day implied moves in either direction (take the tomorrow expiration at the money straddle and divide by the strike price) for tomorrow in each:

C: $1.55 or 1.5%

JPM: $1.80 or about 1.6%

WFC: $1.66 or about 3%

The Wells Fargo implied move sticks out like a sore thumb despite being down a similar amount (about 15%) from its 52-week highs from January, like Citigroup, yet well off of its 52-week lows (about 15%) while Citi is just 6% from its 52-week lows made late last month.

The relative underperformance of bank stocks on the year, and on days like today (XLF up 33 bps vs SPX up 85 bps) remains head-scratching, especially for a group where investors routinely point to as a beneficiary of the strong global economy. As I noted in late May (here) and in an update in late June (here) I remain very skeptical on the group as a whole, that it will turn into a leadership group in 2018. If they can’t rally tomorrow after three of the biggest banks in the world’s results, then I suspect they are a short on every rally until we see new 52-week lows, signaling a capitulation of what appears to be a universally bullish stance from analysts and pundits.

I don’t have a particularly convicted view into tomorrow’s results, frankly, the prudent thing would be to wait and see whether or not the news matches expectations and how the stocks respond.

I would add that those three stocks make up about 25% of the weight of the XLF, which the at the money straddle is pricing about a 24 cent move between now and tomorrow’s close, or less than 1%. While that might seem dollar cheap, its important to remember that of you were to take a shot on a direction, lets say buying the at the money call or put based on a directional inclination, that the likelihood of all three of these names trading in the same direction is not great, and for them to cause the group to outperform the implied movement there would need to be a couple outsized move.