Warren Buffett ignited a bank rally two weeks ago after disclosing that Berkshire Hathaway Inc. (BRK.B) has bought more than 20 million shares of Bank of America Corporation (BAC). The uptick came to a crashing halt on Monday after a late Friday filing revealed that the legendary investor had also dumped more than 35 million shares of Dow component JPMorgan Chase & Co. (JPM), along with shares of The PNC Financial Services Group, Inc. (PNC) and The Bank of New York Mellon Corporation (BK).
- Warren Buffett has sold more than 25 million shares of JPMorgan Chase.
- The stock has failed to mount the 200-day moving average, indicating that it remains in a downtrend.
- Committed buyers have vanished since June.
Taken together, it looks like Buffett had no intention of increasing his exposure to the underperforming banking sector. Rather, he rotated a chunk of capital exiting other banks to pay for the new purchase while picking up gold exposure with the balance. This sleight of hand matched adverse market conditions as a result of the COVID-19 pandemic, but it didn't sit well with investors, who chose to hit the exits to start the new week.
Wall Street consensus currently rates JPMorgan Chase stock as a "Moderate Buy" based upon 11 "Buy," 4 "Hold," and one "Sell" recommendation. Price targets range from a low of $80 to a Street-high $122, while the stock fell nearly three points on Monday and is now trading about $10 below the median $109 target. No big banks have mounted broken support at their 200-day moving averages since March, lowering the odds that they'll reach higher targets before 2021, at the earliest.
Rotation refers to the act of shifting investment assets from one sector of the economy to another. Sector rotation involves using the proceeds from the sale of securities related to a particular investment sector for the purchase of securities in another sector.
JPMorgan Chase Long-Term Chart (2009 – 2020)
JPMorgan stock posted a six-year low in the mid-teens in 2009 and turned higher in a recovery wave that stalled about six points below the 2007 high in 2010. It finally completed a round trip into that level in 2013 and broke out, reaching the 2000 high in 2015. The uptrend completed a multi-decade cup and handle breakout following the 2016 presidential election, posting impressive gains before topping out in the first quarter of 2018.
A complex correction carved an inverse head and shoulders pattern into an October 2019 breakout that posted an all-time high at $141.10 on the first trading day of 2020. It broke down from a small double top in February, entering a decline that found support at a three-year low in March. Ominously, the bounce into the third quarter has failed to pierce broken support, raising the odds that the stock has entered a secular downtrend that could eventually break the March low.
A correction is a decline of 10% or more in the price of a security from its most recent peak. Corrections can happen to individual assets, like an individual stock or bond, or to an index measuring a group of assets.
JPMorgan Chase Short-Term Chart (2018 – 2020)
The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high in the first quarter of 2018 and entered a distribution wave that ended at a two-year low at the start of 2019. Buying power into 2020 failed to match bullish price action, stalling near the OBV midpoint, while the first quarter selloff reached support at the 2018 low. Minor accumulation supported the uptick into June, but buyers have gone on strike since that time.
The second quarter bounce reversed after mounting the broken 200-day exponential moving average (EMA) and reaching the .618 Fibonacci selloff retracement level. It fell through the moving average a few sessions later and failed a second test this week, reinforcing resistance between $100 and $105. More importantly, the pattern off the March low looks corrective rather than impulsive, raising the odds for a renewed downdraft that matches the intensity of the first quarter rout.
The Bottom Line
JPMorgan stock has reversed at 200-day EMA resistance after Warren Buffett disclosed a large share sale.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.