S&P 500 Index bull-trap set-off, drops into the bear's lair as bank's earnings get underway


  • Volatility in US stocks are catching the market off guard today, but there is a trade-off to that.
  • Trapped committed bulls hoping 21-DMA holds for a second crack at the whip.

The fact that JP Morgan's share price cannot hold onto the gains post a very solid and surprisingly positive second-quarter earnings report speaks volumes. As does the inability of the NDX to hold onto a 2% rally to all-time highs.

Trapped bulls may get a second crack at the whip, but the path of least resistance could now be to the downside on a break of a certain structure.

In such an instance, the less committed bulls will flip over and join sides with the bears where far greater opportunities would evolve if their bearish thesis is correct. 

JPMorgan Chase smashed expectations for its second-quarter earnings, however, there are bearish nuggets in here too, mostly pertaining to guidance and the threat of the coronavirus ramifications and limitations in the ability for banks to monetise their asset bases. 

Moreover, the Federal Reserve has signalled that zero interest rates aren't going away anytime soon.

Bad debt write-offs will undoubtedly be a factor anticipated in this week's guidance owing to a cash-constrained market place and mass unemployment. 

In fact, profit was down more than 50% from a year earlier as JPMorgan Chase added to its loan loss reserves to guard against potential loan defaults, but results were helped by record trading revenue.


Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy,”

Chase CEO Jamie Dimon said in a statement. 

However, we are prepared for all eventualities as our fortress balance sheet allows us to remain a port in the storm.

However, his guidance in the following statement is probably the most alarming for investors:

This is not a normal recession. The recessionary part of this you're going to see down the road... You will see the effect of this recession. You're just not going to see it right away because of all the stimulus.

JPMorgan Chase, the nation's biggest bank in terms of assets, is setting aside $8.9 billion for expected losses but was posting better-than-expected income of $4.69 billion.

Meanwhile, Barr Citi's exceptional trading results, theirs and Wells Fargo's reports were not so rosy. 

Wells Fargo, which is under various banking restrictions after a fake accounts scandal in 2016,  posted its first quarterly loss since 2008, setting aside $8.4 billion for anticipated defaults.

The biggest driver of shrinking profits or outright losses, in Wells Fargo's case is the fact that banks are preparing to deal with a pile of toxic loans caused by the pandemic

However, Citigroup also beat expectations despite a decline in its net income from $4.8 billion to $1.3 billion.

Should such results as Wells Fargo's or signs of uncertainty appear habitual in the rest of the large banks with a similar mix of businesses that are due to report earnings in coming days, the week could turn out to be a win for the bears.

S&P Global Ratings warned last week that banks around the world will ultimately suffer credit losses of about $2.1 trillion between this year and next.

Bank stocks have been slammed in 2020 so far

That's why bank stocks have been slammed this year.

The KBW Bank Index (BKX) has lost more than one-third of its value this year, badly trailing the 2% drop for the S&P 500 in 2020.

The SPDR S&P Bank ETF, or the KBE which finished the up 4.8% on Friday, the best-gaining sector for the end of the week, is down today by over 2.6%.

To date, KBE is down 37% from 2020 highs. 

Looking ahead, Goldman Sachs reports on pre-market Wednesday, and Bank of America and Morgan Stanley both report pre-market on Thursday.

S&P 500 Index levels

As per this week's S&P 500 Index ForecastS&P 500 Index Forecast: Bank's earnings in focus, COVID-19 induced insolvency fears simmer away, the index has indeed struggled at the June highs.

The index momentarily scored fresh highs in a break of the counter trendline resistance only to trap the bulls in a bear trap and reverse course sharply back to the 21-day moving average.

Here is the start of the week's outlook chart compared to today's to demonstrate a bearish case in the making:

Break below counter-trendline, a consequence of bull trap 

Trapped bulls may get a second crack at the whip if the 21-day moving average holds and the price breaks back above the counter trendline and subsequently holds daily closes above there to form new support structure. 

 

 

 

 

 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news

How do emotions affect trade?
Follow up our daily analysts guidance

Subscribe Today!    

Latest Forex News


Latest Forex News

Editors’ Picks

EUR/USD tumbles to five-week low on rising US yields, energy crisis

EUR/USD has tumbled below 1.17, hitting the lowest since August 20 as Europe struggles with soaring gas prices and China suffers power cuts. Fed Chair Powell is set to testify and comment about the bank's recent taper signal. 

EUR/USD News

GBP/USD drops below 1.3650 amid firmer dollar, energy crisis

GBP/USD is extending the drop below 1.3650, undermined by the US dollar's strength and the UK's fuel problem. The British army is on standby to mitigate fuel shortages. The pound ignores the hawkish comments from BOE Governor Bailey. 

GBP/USD News

XAU/USD eyes $1730 and $1727 as next downside targets

Gold is off the lows but remains vulnerable amid the underlying narrative the Fed could announce a sooner-than-expected rate hike, as the TIPS market has also started pricing in higher future inflation. 

Gold News

Crypto markets prepare for a bullish October

Bitcoin price shows signs of bullish breakout as it traverses a falling wedge. Ethereum price also displays an optimistic outlook as it forms a descending parallel channel.

Read more

Conference Board Consumer Confidence Preview: Unhappy but still spending

The collapse of consumer optimism in August has not exacted the expected toll from American spending, the most important factor in sustaining the US  economic recovery. August’s confidence reading at 113.8 was the lowest since February.

Read more

Forex MAJORS

Cryptocurrencies

Signatures