The market’s strength since the September lows has caused some Wall Street analysts to raise their targets as investors seem to be encouraged over a possible tax plan and another good earnings season. Several firms like Morgan Stanley (MS) and JP Morgan Chase think the earnings forecasts are too low.
FacTSet is looking for earnings growth of “2.81% from a year ago. Sales are seen rising 4.79% compared with the third quarter of 2016”. But JP Morgan Chase (JPM) commented that "Most of the activity variables we follow suggest EPS growth rate of 10% or more should be achievable in Q3”.
The big banks start the earnings season this week as Citigroup (NYSE:C) and JP Morgan Chase (NYSE:JPM) report before the open on Thursday. On Friday both Bank of America (NYSE:BAC) and PNC Financial (NYSE:PNC) also report earnings.
As the stock market makes further new highs early Tuesday traders with profits in the banks stocks are wondering whether they should sell before earnings or hold for even more gains.
The SPDR KBW Bank ETF (NYSE:KBE) is up over 14% from the September lows and it formed a doji last week. Therefore a Friday close below $44.57 will generate a weekly doji sell signal. KRE tested its daily starc+ band last week but is still below the more important resistance at $46.65-$47.16.
There is first good support now at the rising 20 day EMA which stands at $44.15 with the former downtrend (now support) at $43.36, line a. This is very close to the monthly pivot at $43.38 and the current 38.2% Fibonacci retracement support.
A decline to these converging support levels would be a decline of 4%. On the other hand a rally to the $46.65 would mean a further gain of 3.2%
There are no clear signs yet of a daily top in KBE as there were in Micron Technology (MU) when I advised in June to sell MU before its earnings.
The relative performance (RS), which measures the performance of KBE to the S&P 500, does show a loss of momentum as it has started to lag the S&P 500. At the lows the RS broke its downtrend, line b, signaling that is was starting to lead the S&P 500.
The OBV did make a new high last week and it is well above its rising WMA. It also completed a nice bottom near the lows by breaking through the downtrend, line c.
JP Morgan Chase (JPM) had a high of $97.64 last Friday which was very close to the monthly pivot resistance at $97.66 (point 1). There is short term support now at $95.55 with the rising 20 day EMA at $94.64. The 38.2% support is at $93.80 but I am not expecting a drop to the monthly pivot at $92.61.
The daily RS has lost some of its upside momentum and it is closer now to its rising WMA. The weekly RS has not made a new high with prices as it is still below the July high. The daily OBV shows a pattern of higher highs after completing its bottom in September. It is still above its rising WMA.
What to do? Even though there are no daily sell signals in KBE I still think that taking at least some partial profits now looks like the best strategy. Holding on for another few points after participating in a nice rally does not often work out and I prefer selling long positions before a market starts to correct.
The recent action in JPM indicates that it may be even more vulnerable. Viper Hot Stock traders have found that taking some profits at monthly pivot resistance is often a good strategy. It clearly has more downside risk than KRE.
If one of the banks disappoints on earnings this week then the selling could spread and start a broad based correction in the financial stocks. This is likely to create a good buying opportunity.
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