Financial Stocks in a 'Divergent Phugoid'

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 |  Includes: BAC, C, IYF, JPM, XLF
by: Badger The Lion

A phugoid is an aircraft motion where the vehicle pitches up and climbs, and then pitches down and descends, accompanied by speeding up and slowing down as it goes "uphill" and "downhill." A divergent phugoid is an unstable oscillation, typically caused by a large difference between the incidence angles of the wing and tail [1].

United Airlines (UAUA) Flight 232 suffered an engine failure which caused total hydraulic system failure. The crew flew the aircraft with throttle only. Suppressing the phugoid tendency was particularly difficult, and ultimately Flight 232 crashed.

JPMorgan (NYSE:JPM), a Dow 30 component, and the largest component of the SPX financials, appears to be in a divergent phugoid. Not only is JPM in a divergent phugoid, it also looks like the DJI and SPX are also in a divergent phugoid. Why? JPM is the largest player in the Credit Default Swap [CDS] market, having an approximate $7.8 trillion market share. Citigroup (NYSE:C) and Bank of America (NYSE:BAC) are behind JPM, with about $3 trillion and $1.6 trillion respectively in CDS market share. The top 25 banks hold CDSs, both as insurers and insured, worth about $14 trillion [2], which is approximately equivalent to the total market capitalization of the NYSE listed domestic companies [3].

My hypothesis is that JPM CDS risk models, which functioned reasonably well during nominal "flight" conditions are becoming unstable with current economic "wind shears".

click to enlarge images

JPM Phugoid

Chart created using thinkorswim ProphetCharts. Used with permission.

DJI Phugoid

Chart created using thinkorswim ProphetCharts. Used with permission.

SPX Phugoid

Chart created using thinkorswim ProphetCharts. Used with permission.