Bank on Morgan

07/25/2003 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

"Financial issues have been strong of late, as witnessed by the relative-strength surge of the Philadelphia Bank Index versus the S&P 500 since March," says Bernie Schaeffer of Schaeffer's Investment Research. "And one name that stands out amongst the banking sector issues is J.P. Morgan." Here's his review.

"When looking at the individual components of the bank index, one will see that many of these issues are perched near their annual highs. This relative-strength performance and trek to annual highs does not come unfounded, as the group has made an impressive showing during this earnings season. J.P. Morgan (JPM NYSE) is the second-largest financial services organization in the US. JPM is garnering some attention after releasing second-quarter earnings results that toppled Street estimates by more than 40%. The firm earned 89 cents per share, up considerably from last year's results of 58 cents per share and well above Wall Street's consensus estimate of 62 cents. In terms of revenue, the company collected $8.6 billion for the reporting period, also exceeding estimates.

"The stock is a typical Schaeffer-style trade as it is running counter to the sentiment. JPM has seen its stock advance from 21 to 35 from its March lows. Over this period, Wall Street brokerage houses have not been overly convinced in the turnaround. Only five out of 13 analysts rate the stock a 'buy' in spite of beating Wall Street estimates by 38 and 46%, respectively. Option activity has been very bearish with 187 puts in open interest for every 100 open calls. With the stock finding support from its ten-week moving average, we feel the risk-to-reward is well defined at current levels.

"JPM has exhibited a monster uptrend over the past four months, rallying 88% from its mid-March nadir. The stock has been making impressive headway from a long-term perspective. In May, the stock enjoyed its first monthly close beyond its 20-month moving average since January 2001. This long-term trendline is on the verge of being crossed over by the ten-month trendline, a bullish technical sign. It will be the first such bullish cross for the security since June 1995. Traders should target a move to 38.60 with a stop-loss on a close below 33.80."

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