Our Algo Engine has triggered a sell signal in Goldman Sachs.
We maintain a negative outlook and advise running a stop-loss should the price action trade above the signal high of $235.
Following the Algo Engine short signal in General Electric, the price action continues to carve-out lower levels.
Should we see GE trade down to $22, we would consider this price target as an oversold and providing a suitable entry point for new long exposure.
US media reports suggest the US economy is flashing a warning sign that could mean US is headed for a downturn.
Credit card companies are starting to grow nervous as the net charge-off rate, or the percentage of loans that credit card issuers write off as a loss, has just hit its highest level in four years, a continuation of several quarters of the rate rising.
The trend hit all major card issuers and is starting to eat into bank earnings. The current rate is 3.29%, but it is still a long way from the peak hit in 2010 of 10%.
The rate had dropped for 24 straight quarters during the recovery, until a reversal in recent quarters.
The “cause and effect” logic is that once credit card defaults begin to rise, the default rate on mortgages also begins to rise, which is a much bigger problem for the US economy.
Credit Card Default Rate
The Dow Jones 30 Index posted its 5th consecutive new record high close today at 21,891.
During the month of July, the Index gained 570 points, or 2.6%.
As the chart below illustrates, 310 of those 570 Dow points were generated by one stock: Boeing.
Boeing shares climbed over 24% during the month of July from $197.75 to $246.00. In just the last 5 trading sessions, Boeing shares rose 16% from $212.50 to $246.00.
Since the Dow is a price-weighted Index, a higher point value, or Beta, is assigned to higher priced stocks.
Boeing
Shares of Alphabet, parent company of Google, are down over 3% to $967.00 in aftermarket trade.
After the close of trade today, the tech giant posted a 27.7% drop in quarterly profit compared to a year ago.
The company beat expectations on both the top and bottom line with earnings of $5.01 per share on $26 billion in revenue, compared to earnings of $4.49 per share on $21.5 billion a year ago.
However, a dip in net income from $4.88 billion a year ago to $3.50 billion this quarter offset the better-than-expected earnings.
Our ALGO engine triggered a buy signals on Alphabet on June 30th at $908.00. We will look for initial support at or near the $945.00 level.
Alphabet (Google)
As both the Dow Jones 30 and the S&P 500 rose to new all-time highs this week, daily trading volume was 20% lower than the 3-month average and “short interest” in stocks fell to the 2007 lows.
Short interest is defined as the total Dollar value of stocks which investors have “sold short”, which they don’t own, with the idea of making a profit after buying them back at a lower price.
The combination of seeing the Dow and SP 500 rise to new highs on lower volume, and contracting short interest, is an illustration of a technical “short covering” rally.
Seeing index prices at new highs on lower volume suggests that “new money” is not coming into the market and that stock prices will revert lower after “short sellers” have taken their losses.
This technical combination doesn’t always trigger an immediate sell off in stocks. However, the market condition of “higher highs on lower volume” is often cited after a material correction in the market occurs.
As US earnings season goes into full swing next week, we’ll continue to watch the price/volume correlation and the potential impact on the market.
Before the US market opens later today, JP Morgan, Citigroup and Wells Fargo will report their Q2 results.
After last year’s post-election rally, these stocks and others in the financial sector have been trading in wide ranges.
However, over the last few weeks, bank stocks have rallied after the results of the FED’s “stress tests”, a push higher in short-term rates and hopes of further government de-regulation.
For Q2, JP Morgan is expected to report earnings of $1.57 per share, up 2 cents from last year on revenue of $24.8 billion. Wells Fargo is expected to report earnings of $1.02 per share, which is up 1 cent from last year on revenue of $22.3 billion. Citigroup is expected to report earnings of $1.21 per share, which is 3 cents below last year on lower revenue of $17.3 billion.
Our base case for the US banks is that trading revenues will be trending lower for the remainder of the year and the current levels look fully-valued with risk to the downside.
JP Morgan
Citigroup
Wells Fargo
The Dow Jones and NASDAQ charts below show the indices continuing with the “higher high and higher low” formation.
The XJO shows a slightly more bearish pattern, as our local market struggles below the recent 5850 high.
Our Algo Engine triggered a sell signal in GE back in December 2016.
At that time GE was trading at or near $32.50 and since then the stock has sold off and is now trading $26.00.
A week after the FED announced that 33 of 34 major US banks had passed their financial stress-tests, the banks have released their revised share buyback and dividend plans.
Analysts had estimated that positive stress-test results would open the way for banks to boost dividends and share buybacks by up to 25%, which could translate to about $30 billion back to shareholders through higher dividends and share prices.
Some of the specific plans include Citi-Group buying back up to $15 billion in shares and increasing their dividend to 32 cents per share, and JP Morgan buying back up to $19 billion in shares and lifting their dividend from 50 cents to 56 cents.
While these announcements were bullish for the share prices today, a longer-term valuation question is: How are the major US banks going to maintain these share and dividend levels?
Against a back drop of lower loan creation, thinner margins and increased bad loan provisions, we’ll track the recent price action and see if the bounce from the recent lows will be sustainable.
JP Morgan
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