Select Page

What is the Market thinking?Build Mind Share & Market Share In Your Channel

and what’s up with banks?

 

JP Morgan JPM, Wells Fargo WFC, and Citigroup C

These 3 started off earnings seasons. They all beat estimates, and they all sold off. Why?

Why on all time frames?

This happened a lot on the last earnings season, that led to the infamous February crash. Markets tended to sell earnings, whether good or bad. Why?

short term

Could it be as simple and prosaic as:

The market knows companies have to wait 2 days after
earnings reports, before they can start buying their stock
back.

And since this year, the market expects record buybacks,
maybe everyone sells the earnings, looking to buy back later,
and ride it up as the company buys it up.

This seems easy to test. Just watch the behavior of companies
3 days after earnings.

However, even if true, the picture could be muddied, if, the
next wave of earnings reports also get sold, or the market goes
down for other reasons.

However, I might try the play:

Wait 3 days after earnings reports. Then, if a stock is at some
good technical support level, and a reversal type day occurs,
buy it.

This assumes the rest of the market is neutral to up at the
time.

Banks in particular

Would banks in particular have some more fundamental
reason to sell off, in the bigger picture?

I gather that most institutions have been bullish on banks.

I guess the thinking is that, if interest rates go up, they’ll
make more, assuming the economy keeps growing. And
the talking point on that has been bullish (“global synchronized
growth.”)

Why then did Wells Fargo gap down 10% on Feb 2?

Right through the highs and in to the ranges of 2015
and 2017?

That’s a pro gap. A big gap starting a move. And this
was 2 weeks after they reported earnings of 1.16 per
share vs 1.05 expected.

Yet the stock gapped straight through that level. The
market suddenly realized it was worth a lot less. Why?

Alt Banks thesis

Banks would make more in loans with higher interest,
if the economy supports making more loans.

And, assuming higher interest rates don’t trigger a
wave of defaults (evaporation of bank assets.)

How high would that be? I guess most people think
it must be 5% or higher.

But what if, each time we do
another, bigger wave of creating money through debt…

It produces a correspondingly smaller wave of actual
economic growth, with a lower and lower ceiling of
tolerance for interest rates?

What if the world goes in to a default spiral, when
the Fed rate hits 2%, or 2.5%?

Also, in my understanding, the market can drive interest
rates up.

As the Fed is increasingly flooding the market with US treasuries,
right at the same time government spending is back at
record deficit spending (also flooding the market with
more treasuries…)

…In theory, buyers (China, institutions, retail investors)
would demand higher compensation, in order to increase
consumption, as supply expands. Bonds have to pay
higher interest to attract buyers in a free market.

Then, if bond interest rates go up, it would cause lenders
to raise other types of rates, at least above the rate for
US treasuries…because if they don’t make more than that,
than why not just buy US treasuries, instead of loaning
money?

So interest rates could spike all by themselves, not because
of the Fed funds rate. At least, that’s my understanding.

Technically

See how that giant gap down filled a little bit, then
continued down? Typical.

Now it’s moved down on earnings again. There is a
support trend-line. And WFC has already almost
completely retraced the 2017.

Good chance it will support, and move back up from
near here.

But in the big picture, that’s pretty darn bearish.

It might be a long from around $50, with a first
target on that mini, amateur gap, at $54.5, and
and extended target of the gap low above, around
$60.

$60k would be a great place to short. Maybe in
August?

Bigger picture:

Zooming out, that ascending wedge is bearish to
my eye.

So from $60, I could see if falling, quite a ways, with
some targets clearly marked out: $50, $45, and $38.

$38 is 50% of the up move since 2009. It would be
great buy.

I will try these trades if it plays out like this, and of
course reassess if it does otherwise.

The Market Mind

So, what is the market thinking?

Why these persistent sell offs, since early Feb 2017?

Is it really worry about Tariffs, wars, Trump’s porn
affair? Maybe.

But what if, there is one, giant elephant, which
overshadows all of these. Central bank tightening.

What if the market foresees this leading to a giant
credit contraction, as described above?

Massive deflation, shrinkage of asset values, leading
to another wave of printing, and an even bigger wave
of inflation?

The market is supposedly predictive of economic
movements in the 6-12 month out range.

Follow

Get the latest posts delivered to your mailbox: