- Published on Friday, 13 July 2012 15:19
- Written by Sara Nunnally, Editor, Inside Investing Daily
- Hits: 767
The numbers are in and JPMorgan surged higher today. But can it last? And more important, can we trade the news?
JPMorgan (JPM:NYSE) released its earnings today, showing the London Whale loss coming in at $4.4 billion. That's well over double the first estimates, but about half of the worst-case scenario projections.
At least, that's the amount lost from April through June. The actual amount lost is closer to $5.8 billion if we count first-quarter losses.
And JPM might not be done yet.
CEO Jamie Dimon says the trade could lose another $700 million to $1.7 billion as the rest of the trades are unwound.
The market loves this news.
JPM soared more than 4% in the first half hour of trading. It was a brilliant strategy -- put out an absurdly high number and get people worried, then come in well under that figure, and you look better than you actually are.
Makes me wonder if this 4% move is going to stick around, or if it's just a bogus bump higher.
Dimon says this trade debacle is an isolated incident, and not a widespread problem, but I'm not so sure.
The bank's internal investigation showed its traders may have deliberately lied or covered up the true value of certain trades in order to mask losses.
That kind of behavior isn't just a mistake, or a bet gone wrong. It isn't tied solely to the London Whale trades.
It's human nature.
If JPM finds itself in the same position again somewhere down the road -- which it will if the banking structure stays the same and certain proprietary trading is allowed to continue -- then maybe the markets won't be as forgiving.
But for now, look at what JPM's share price is doing.
The red line represents a former double top pattern, and the orange line represents strong resistance at $37. (This is where I told my Macro Trader subscribers to exit our put option play, should prices climb back to that level.)
And then JPM announced the $9 billion potential figure. This had me nervous. Two weeks ago, I said:
My Macro Trader put options play on JPM has survived, and is regaining ground. We've seen that the clear test of the $37 level I told you about on Monday has been met with resistance. It's going to be a rocky descent from here.
My concern is that JPM will drop to $32 just before its earnings release on July 13, but then pop higher.
And JPM did trend lower, trading just below $34 before earnings. But we never got to $32, marked as a green circle on the chart.
How far will this earnings news take JPM?
A 4% pop is a big jump... And JPM did report earnings of $1.21 a share, or $5 billion for the quarter. That's lower than the $1.27 the company earned in the same quarter last year, but not a bad showing considering what was at stake.
(Although a closer look at the report shows JPM moving $2.1 billion into the profits column after it had fewer defaults and delinquencies than expected. All that means is that the bank thinks it can hold less cash in reserve to deal with bad loans.)
I still have my doubts, and a big part of my Macro Trader position hinges on staying below $37. And even with this major 4% move, JPM's share price is still more than $1.50 below my stop-out level.
I'm inclined to let this position ride, and find out where it takes us.
For those of you not in JPM, though, the charts show that it's decision time. Will JPM push through that $37 level, or fall away from it? I am reluctant to play JPM either way at this level.
Earnings momentum could certainly continue into next week. If you want to play the potential $1.50 move higher, you're a braver trader than I am.
What's likely to happen, though, is JPM will sway with the markets. Today, markets were up on news from China. Who knows where the markets will take us on Monday, and I think JPM will probably follow them -- either higher or lower.
There's still the investigation into rate setting that has JPM and a number of other big banks under the microscope, and there's still a percentage of the London Whale trade still to be unwound.
I'm by no means bullish on JPM right now -- despite the 4% move higher.
Macro Trader is still holding its put options.
Other Related Sources: