"Banks are doing terribly because the loan volume is likely to shrink as we see interest rates going higher because it's difficult for people to afford higher rates," DoubleLine Capital CEO Jeffrey Gundlach told CNBC in October. The nearly year-long trade war between the United States and China, as well as headaches ironing out a workable Brexit deal, have also cast shadows over the once-loved financial sector.
Although the Federal Reserve (Fed) is likely to hike interest rates at least twice in 2019, merger and acquisition (M&A) activity is expected to remain robust due to continued corporate earnings growth, albeit at a slower pace, and near all-time-low interest rates in emerging market economies. In addition, initial public offerings (IPOs), specifically by technology companies, should continue to boost Investment bank earnings in the year ahead, with ride-share disruptors Uber Technologies Inc. and Lyft Inc. considering going public.
Traders who think the recent heavy selling in investment bank stocks may be overdone should explore trading opportunities in these three financial sector heavyweights.
The Goldman Sachs Group, Inc. (GS)
The Goldman Sachs Group, Inc. (GS), founded in 1869, is a global investment bank that specializes in securities dealing, investment management and institutional client services. The New York-based company generates 40% of net revenue outside of the Americas region. Goldman Sachs stock has a market capitalization of $62.96 billion, offers a 1.87% forward dividend yield and is down 32.33% year to date (YTD) as of Dec. 20, 2018.
The financial firm's share price started trending lower from mid-April, with the decline accelerating during November and December. Although Goldman's stock chart looks weak, the price currently sits on the lower trendline of a falling wedge pattern that may provide a support area from which to stage a reversal. To avoid catching a falling knife, traders should wait for a bullish candlestick pattern, such as a hammer or piercing pattern, before going long. Look to exit on a retracement to the $200 level, where the price finds a confluence of resistance from the 50% Fibonacci retracement level and the 50-day simple moving average (SMA). Place a stop-loss order below the reversal pattern used to enter the trade.
Morgan Stanley (MS)
Morgan Stanley (MS), with a market cap of $67.6 billion, provides a range of financial products and services, such as institutional securities, wealth management and asset management to corporations, governments and other financial institutions. According to Bloomberg, Uber has selected Morgan Stanley to lead its public offering next year. As of Dec. 20, 2018, the investment bank's stock has returned -23% on the year, underperforming the S&P 500 Index by close to 17% over the same period. The company pays investors a 3.01% dividend yield.
After printing a YTD high at $58.35 in March, Morgan Stanley's share price has tracked steadily lower within a descending channel throughout 2018. Traders who want to swing trade the stock should seek entries close to the channel's lower trendline at the $39 level. Consider banking profits between $44 and $45, where the price may stall as it finds resistance from the 50-day SMA and the channel pattern's upper trendline. Use a stop order below the entry candlestick to protect trading capital should the price continue to fall.
JPMorgan Chase & Co. (JPM)
JPMorgan Chase & Co. (JPM) engages in investment, consumer and commercial banking as well as asset and wealth management with more than $2.5 trillion in assets under management (AUM). Headquartered in New York, the company operates through a network of over 5,000 branches. The previously referenced Bloomberg article reports that JPMorgan is leading Lyft's public offering. Trading at $97.29, with a $323.53 billion market cap and offering a 3.29% dividend yield, JPMorgan stock is down 6.7% YTD, outperforming the global banks industry average return by nearly 14% over the same period as of Dec. 20, 2018.
The JPMorgan chart has formed a broad double top pattern throughout 2018. Since September, the price has oscillated within a descending channel. Those who anticipate a bounce should enter if the price starts to reverse on the channel pattern's lower trendline. To confirm upward momentum, traders could wait for the relative strength index (RSI) to move back above 30. Think about placing a stop several points below the entry price and taking profits between $108 and $110 – an area where the price runs into resistance at key Fibonacci levels, the 50- and 200-day moving averages, and the descending channel's upper trendline.