Investors Concerned About JPM

May 20, 2014, 09:15 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Recent concerns about the banking industry have investors on edge, legislation concerning the valuation of the dollar and the level of interest rates in the open market don't help, but the real issue at hand today is valuation.  In some cases, banks simply are not growing, but stocks prices have still skyrocketed in recent years.  The question is, if growth falters, will stock prices revert back to where they were?

Investors have reason to be concerned about JP Morgan (NYSE:JPM).   The stock price has recently faltered, the stock looks like it is threatening to break down, and recent EPS and Revenue results are questionable.  In fact, although the early part of 2013 brought with it EPS results that were better than at any point in recent history, EPS results recently have fallen to levels not seen since 2011.

Further analysis shows that Revenues have not done much better either.  Revenues have been steadily declining, presenting another concern for investors in JPM.  Arguably, EPS results would need to stabilize right here in order for JPM's stock price to stabilize, according to our analysis.

Given the estimates on the Street currently, it appears as if that is exactly what the majority of analysts expect.  They are looking for relatively flat EPS results Q/Q next time JPM reports.  That should immediately comfort some investors, but when price-based analysis is factored in another catalyst becomes quite clear.

Traditionally, stocks move before the news, so it behooves us all to look at the decisions smart money makes with their pocketbooks to get ahead of the curve.  Recently the stock has come under pressure, and it has now fallen enough to test our longer term support levels officially.  If the analysts are right and EPS stability follows the stock may very well hold longer term support, but the risks are quite clear if longer term support begins to break. 

According to our real time trading report for JPM, if longer term support breaks nothing is stopping the stock from falling into parity with its 2011 EPS results.  That is another way of saying that meaningful declines can come if longer term support breaks, and it is being tested now.

Importantly, if longer term support does begin to break it will also be a sign, a precursor, that institutional investors are losing faith in the JPM story.  This will be a message they send with their investment decisions, and whatever they say investors must listen carefully.

For now, EPS has clearly come under pressure, and investors have already started to take notice.  What they do next will be the tell that smaller investors should really listen to.

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