A decision by JPMorgan Chase & Co. (JPM) in August last year to unveil an investment app offering all customers up to 100 free stock or exchange-traded fund (ETF) trades in their first year, along with unlimited trades to Chase Private Client customers, was arguably the catalyst that started a six-month downtrend into bear market territory for several major investment brokerage stocks.
In an industry already besieged with growing compliance costs and slow-moving interest rates, investors began to question how brokerage firms would reinvent themselves to generate revenue in a shrinking fee environment. Ironically, offering heavily discounted commissions may be one of the most effective ways to go about it. It allows brokerages to onboard new customers to whom they can on-sell other more complex products, such as specialist financial advice or exotic derivatives.
"What this is all about is JPMorgan's way of growing their customer base," said Gerard Cassidy, a banking analyst at RBC Capital Markets, per CNBC. "If they can attract new customers with this type of product, and then cross-sell into those customers other, more profitable products, they come out ahead," he added.
CME Group Inc. (CME)
Chicago-based CME Group Inc. (CME) operates exchanges that facilitate trading in futures and derivatives. It covers asset classes such as interest rates, equity indexes, foreign exchange, energy, metals and commodities. The company recently announced that the Dutch finance ministry grated approval for it to operate its new trading platforms, BrokerTec and EBS, in Amsterdam to avoid disruption to customers from Brexit. Trading at $170.37, with a market capitalization of $60.96 billion and yielding 1.74%, the stock is down 9.04% year to date (YTD), underperforming the financial exchanges industry average by 3.39% as of March 13, 2019.
CME Group's share price has traded in a choppy descending channel since mid-November last year that has provided both long and short trading opportunities. The bears have taken control of the stock in March and pushed price toward the descending channel's lower trendline – a key support area. Traders who take a position here should place a take-profit order near the pattern's upper trendline at the $182 level. Set a stop below the late-September swing low to protect trading capital.
The Charles Schwab Corporation (SCHW)
With a $58.63 billion market cap, The Charles Schwab Corporation (SCHW), provides brokerage, banking and asset management services. The company runs its brokerage business through a network of physical locations as well as through an online investing platform. Charles Schwab surpassed the Street's top- and bottom-line fourth quarter projections due to higher interest margins and an uptick in trading activity over the period. Analysts have a 12-month price target on the stock at $51.28 – 17% above Tuesday's $43.99 closing price. As of March 13, 2019, Charles Schwab stock pays a 1.54% dividend yield and has a YTD return of 6.33%.
Although Charles Schwab's share price has failed to break above a long-term downtrend line extending back to May 2018, it appears to be in the process of forming the right shoulder of an inverse head and shoulders pattern – a bottoming formation. More recent price action shows the stock holding a key support level at $44. Those who buy the pullback should look for a move back toward $48 – an area where the price may encounter resistance from the 200-day simple moving average (SMA) and a trendline that connects the November and January swing highs. Cut losses if the stock falls below $43, as this invalidates the setup.
TD Ameritrade Holding Corporation (AMTD)
TD Ameritrade Holding Corporation (AMTD) provides securities brokerage and advisor services to retail investors and traders as well as to independent registered investment advisors (RIAs). The Omaha-based brokerage firm generates the majority of its income from commissions and from asset-based revenue, such as interest on margin loans and portfolio management services.
TD Ameritrade is becoming an income investor's stock of choice – investors receive a forward dividend yield of 2.20%, which compares the investment bank industry's average yield of just 0.97%. Moreover, the company has a record of hiking its dividend. It has increased five times on a year-over-year (YoY) basis over the past five years for an average annual jump of 15.10%. TD Ameritrade stock has a market cap of $30.55 billion and is the best performer of the three stocks discussed with a YTD return of 11.97% as of March 13, 2019.
TD Ameritrade's share price also looks to be forming a possible inverse head and shoulders pattern. The stock has recently retraced to the $54 level, where it finds a confluence of support from the 200-day SMA and a horizontal line that connects a series of prices over the past six months. The buy case also gains further conviction with the 50-day SMA crossing above the 200-day SMA in Tuesday's trading session, in what is known as a "golden cross" by technical analysts – a signal indicating that a new uptrend has commenced. Traders should set an initial target price near $58 and look for a possible test of the early June 2018 high if the price continues upward. Think about positioning a stop-loss order just below $53.