JPMorgan Chase & Co. (JPM) is the largest of the four "too big to fail" money center banks and is the only major bank in the Dow Jones Industrial Average. The stock ended 2018 down 8.7% for the year and offered a dividend yield of 3.45%, ranking as the sixth cheapest stock among the Dow 30.
JPMorgan is thus one of the eight stocks I consider to be a member of the "Dogs of the Dow" for 2019. My definition of the "Dogs of the Dow" has a different twist from conventional wisdom. Mine consists of the eight stocks with a dividend yield of at least 3.00% that had a down year the prior year. Today, JPMorgan's P/E ratio is 11.48 with a dividend of 3.18%, according to Macrotrends.
This banking giant ended the third quarter with $2.326 trillion in total assets, which represents 13.2% of the entire banking system. The stock ended Christmas Eve at $92.14, dipped to $91.11 on Boxing Day and then rallied by 10.2%, which is a solid gain out of bear market territory. At Wednesday's close of $100.40, JPMorgan stock is up 2.8% so far in 2019 and is in correction territory at 15.9% below its all-time intraday high of $119.33 set on Feb. 27.
JPMorgan CEO Jamie Dimon said in a conversation with Maria Bartiromo that tight credit conditions are not a concern. If that were the case, why did Chase raise credit card rates in April 2018 by 100 to 400 basis points on top the 25-basis-point raise following each of the rate hikes by the Federal Reserve?
Another concern for the big banks is the draining of the Federal Reserve balance sheet. On Jan. 2, the balance sheet was marked at $4.058 trillion, down $442 billion since the end of September 2017, when it was $4.5 trillion. The Fed was expected to drain $50 billion in December, but it turned out to be $30 billion. Is this a sign of concern by Fed Chair Jerome Powell? Investors will find out more this afternoon when Powell faces questions from the Economic Club of Washington.
My Fed Call: I believe that the FOMC will raise the federal funds rate in June and again in December to reach a "neutral" 2.75% to 3.00%. The balance sheet drain will likely vary between $30 billion and $50 billion per month.
JPMorgan is one of the most important components of the Dow 30, as it's the first company in the average to report earnings for its quarter ended in December. Analysts expect the bank to report earnings per share (EPS) of $2.22. JPMorgan has beaten EPS estimates for 12 consecutive quarters. Even with this track record, an earnings beat does not always result in a positive share price reaction.
After Treasury Secretary Steven Mnuchin spoke to the CEOs of major banks on Sunday, Dec. 23, shares of JPMorgan traded as low as $91.11 on Dec. 26. This was an opportunity to buy the stock on weakness to my annual value level for 2018 at $93.20. This year, I show an annual risky level at $102.64, which could limit the upside through the earnings report.
The daily chart for JPMorgan
The daily chart for JPMorgan shows that the stock has been below a "death cross" since Nov. 12, when the 50-day simple moving average plunged below the 200-day simple moving average, indicating that lower prices lay ahead. When under this negative pattern, the trading strategy is to sell strength to the 200-day simple moving average, which was tested on Dec. 3 when the average was $111.47.
The stock set its all-time high of $119.33 on Feb. 27 and then set a secondary high of $119.24 on Sept. 20, which can be considered a double top. The four horizontal lines above the price action are my annual, monthly, semiannual and quarterly risky levels of $102.64, $106.56, $110.75 and $114.39, respectively.
The weekly chart for JPMorgan
The weekly chart for JPMorgan will be upgraded to positive if the stock closes Friday above its five-week modified moving average of $101.98. Without this positive, the stock has downside risk to its 200-week simple moving average, or "reversion to the mean," at $84.42. This "reversion to the mean" was last tested during the week of Feb. 12, 2016, when the average was $54.44. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 24.95 this week, up from 19.14 on Jan. 4 and rising above the oversold threshold of 20.00.
Given these charts and analysis, investors should be patient with adding to long positions given the risk to the "reversion to the mean." If you bought the stock at my 2018 annual value level of $93.20, reduce holdings on strength to my 2019 annual risky level at $102.64. The longer-term buy level is the 200-week simple moving average at $84.42. My January risky level is $106.56, and my semiannual risky level is $100.75.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.