Banking stocks trail the S&P 500 by about 30% so far this year as investors fret over the nation’s largest lenders setting aside billions of dollars in loan-loss provisions to safeguard against a prolonged recession and crimped profitability from near record-low interest rates. Those fears where somewhat soothed Friday after the Conference Board’s consumer confidence index edged up to 86.6 this month from 85.7 in April.
“Short-term expectations moderately increased as the gradual re-opening of the economy helped improve consumers’ spirits,” Lynn Franco of The Conference Board told CNBC. The reading, while significantly below pre-pandemic levels, also easily eclipsed analysts’ forecasts, indicating that U.S. consumers may be in a better financial position than first thought – meaning fewer loan defaults and a quicker economic recovery.
From a technical standpoint, each of the three banking stocks outlined below broke out from a period of consolidation Tuesday that could lead to further gains in the weeks ahead. Let’s take a closer look at each company and analyze the charts to identify important trading levels.
JPMorgan Chase & Co. (JPM)
With more than $2.74 trillion in assets, JPMorgan Chase & Co. (JPM) provides a wide range of financial services, including consumer banking, investment banking, and asset management. Although the New York-based bank saw its first quarter (Q1) earnings plunge 69% from a year earlier due to a sharp rise in loan loss provisions, it sits well positioned to attract millennial customers through its increasing use of digital channels and artificial intelligence (AI). As of May 27, 2020, JPMorgan stock issues an enticing 4.02% dividend yield but has fallen nearly 30% year to date (YTD).
After trading sideways for the past two months, the stock broke out above a short-term trendline and the 50-day simple moving average (SMA) on heavy volume in Tuesday’s session. Those who are looking to play the breakout should think about targeting a move to $110, where the price encounters resistance from the October 2019 swing low and early-March gap. Consider placing a stop-loss order either under yesterday’s low at $92.61 or beneath the breakout level at $90, depending on personal risk tolerance.
Wells Fargo & Company (WFC)
Wells Fargo & Company (WFC) offers diversified financial services to individuals, businesses, and institutions in the United States and globally. The bank, which reported a Q1 353% year-over-year increase in credit loss provisions, has also beefed up its digital efforts in recent years by adding additional contactless payment methods to benefit from a growing number of U.S. merchants who accept such transactions. According to Business Insider, 44% of U.S. consumers prefer contactless payments. Wells Fargo stock has slumped 49.29% on the year but recouped almost 10% in the past week as of May 27, 2020.
The banking giant’s stock started its current downtrend in early January, with losses accelerating as the coronavirus pandemic took hold. More recently, price gapped above the top trendline of a narrow two-month descending channel Tuesday to settle just below the 50-day SMA. Those wanting to trade the upside momentum should consider booking profits around $37, where the stock may find sellers near the green trendline. Cut losses if the price reverses below the channel pattern.
U.S. Bancorp (USB)
With a market capitalization upwards of $50 billion, U.S. Bancorp (USB) is the largest regional bank in the United States. The Minneapolis-based firm offers corporate and commercial banking and a range of wealth management and other investment services. While squirreling away nearly $1 billion for bad loan provisions, the bank still delivered a Q1 47% earnings surprise thanks to higher loan and deposit balances, as well as a rise in fees income. The bank plans to partner with fintech companies to continue providing competitive, innovative banking technology. As of May 27, 2020, U.S. Bancorp stock has declined 38.86% YTD; however, an attractive 5% dividend helps offset some of the price depreciation.
Two prominent swing lows to the $28.50 level between March and April indicate a possible double bottom. Although the price has not yet risen above the pattern’s neckline, the stock has gained short-term momentum by closing convincingly above a trendline extending back to mid-February and the 50-day SMA. The trade offers a favorable risk/reward ratio of around 1:3.5 for those who place a profit target near resistance at $47.50 and stop order below yesterday’s breakout level at $32.50 (risk per share of $3.33 vs. reward per share of $11.67).