JPMorgan Chase (JPM) Testing 2020's All-Time High

Bank stocks have exploded to the upside this week, with investors hoping the Democratic Congress will herald in a period of renewed economic growth and additional stimulus. Dow component JPMorgan Chase & Co. (JPM) is particularly well positioned after rallying within three points of January 2020's all-time high, but a lot more buying interest will be needed in the first quarter to mount that resistance level.

Key Takeaways

  • Bank stocks have surged to multi-month highs as investors speculate about a Democratic Congress.
  • Sector leader JPMorgan Chase reports earnings next week.
  • The stock is trading about five points below January 2020's all-time high.
  • Weak accumulation readings could delay or deny a breakout.

The CBOE 10-Year Treasury Yield Index (TNX) has rallied to a 10-month high, within striking distance of the March peak, just before the Fed embarked on an aggressive stimulus program. The strong bid and widening yield curve follow expectations that growth will surge in the second half of 2021, after vaccines make their way around the planet. Higher interest rates mean bigger margins for commercial banks, but lending needs to grow as well to support higher equity prices.

The company reports fourth quarter 2020 earnings on Friday, Jan. 15, with analysts expecting a profit of $2.58 per share on $24.4 billion in revenue. If met, earnings per share (EPS) will post almost no change compared to the same quarter in 2019. The stock closed lower in October after beating third quarter top- and bottom-line estimates and ran in place until November, when Pfizer Inc. (PFE) vaccine studies triggered a sector-wide advance.

JPMorgan passed the latest Fed stress test with flying colors in December, allowing the banker to maintain a $0.90-per-share dividend and authorize a new $30 billion share repurchase program. Those transactions may have already started, adding value to the current price. CEO Jamie Dimon also landed on the right side of history on Wednesday, strongly condemning the rioting in Washington while calling for an end to the violence.

Wall Street sentiment on JPMorgan stock is mixed, with a "Moderate Buy" rating based upon eight "Buy" and six "Hold" recommendations. One analyst still recommends that shareholders close positions and move to the sidelines. Price targets currently range from a low of $98 to a Street-high $164, while the stock has opened Friday's session about $2 above the median $134 target. Additional gains may be tough until targets are raised, which could happen after next week's earnings report.

A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. There are three main types of yield curve shapes: normal (upward sloping curve), inverted (downward sloping curve), and flat.

JPMorgan Daily Chart (2018 – 2020)

Chart showing the share price performance of JPMorgan Chase & Co. (JPM)

The uptrend that began in 2016 stalled near $120 in the first quarter of 2018, giving way to a trading range, followed by a fourth quarter breakdown that found support at a 15-month low. The subsequent recovery reached the prior high in May 2019, yielding sideways action into an October breakout that posted an all-time high at $141.10 on Jan. 3, 2020. The stock failed the breakout during the pandemic decline, dropping to the lowest low since the 2016 election.

The second quarter bounce stalled at $115.77 in June, generating higher lows during the summer, followed by a November breakout that has attracted sustained buying interest. The stock has opened Friday's session at $136, above the .786 Fibonacci selloff retracement level, suggesting a rapid advance into the 2020 peak. However, accumulation has failed to keep up with bullish price action, suggesting months of consolidation prior to a sustained uptrend.

Accumulation typically refers to a position size in an asset that increases over multiple transactions. It can also refer to the overall addition of positions to a portfolio or a general increase in buying activity in an asset. 

The Bottom Line

JPMorgan is nearing a critical test at January 2020's all-time high, but weak accumulation readings do not favor a breakout at this time.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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