(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
JPMorgan Chase & Co's (JPM) stock has rebounded by more than 10% since hitting a low of almost $102 in early July to its current price of almost $114.50. Investors rewarded the stock after the company reported strong second-quarter results, sending shares higher. But the excitement appears to be fading, and the stock may be due to drop by as much as 7% in the coming weeks, based on technical analysis.
Should the stock struggle, it may be a result of the spread for short-term and long-term U.S. Treasury bond's contracting. The contracting spread - also known as flattening, may have a negative impact on the bank's future revenue and profits.
Nearing an Uptrend
Morgan's stock increased to roughly $119 at the beginning of August, re-testing its previous highs from earlier this year. But now shares are trending lower and are nearing a technical uptrend around $112. Should the stock fall below that uptrend, it may cause shares to drop to the next level of technical support 7% lower at roughly $106.5.
Momentum Turns Bearish
Another bearish warning sign may be the declining levels of volume as the stock was rising during July. It suggests the number of buyers was fading. Now, the stock has been falling in recent days on increasing levels of volume. Suggesting the number of sellers is growing. The relative strength index (RSI) - another technical indicator, has also been trending lower. It suggests bullish momentum is leaving the stock. The RSI hit an overbought level above 70 two times recently, once in July and August, another bearish sign.
Flattening Yield Curve
The technical weakness may reflect the flattening yield curve. The spread has declined from a high of 80 basis points (bps) in early February to less than 25 bps currently. Morgan's stock followed the flattening curve lower from February until July. It was then that the yield curve began to widen, rising from 24 bps to 32 bps, at the same time Morgan's stock also rebounded. But, in August, the yield curve began to flatten again, taking Morgan's stock lower with it.
At this point, Morgan's stock may be linked to the direction of the yield curve. Should the yield curve continue to flatten, that may be horrible news not only for JPM’s stock but all the banks as well.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.