JPMorgan: Why I'm Selling Short

After scanning the charts this early Monday morning, I’ve zeroed in on an investment bank behemoth in the financial industry that sometimes buys up other competitors when they get into liquidity trouble, as they just recently did during this time of liquidity credit crisis. Longer term, we would be a share buyer of this excellent company. Near to intermediate term, I’m putting a sell on it.

Short Sale: JP Morgan Chase (JPM)

• Closing Price Friday Aug 29. 38.49
• Sell Entry: 38.09 to 39.18
• Stop-Loss: 40.69 to 41.07

Take Profit Areas

• Short Term: 34.63 to 35.18. Risk/reward of about 3:1
• Intermediate Term: 33.70 to 34.23. Risk/reward of about 4:1
• Long Term: 30.76 to 31.24. Risk/reward of about 8:1

Company Profile

From Google Finance:

JPMorgan Chase & Co. is a financial holding company. JPMorgan Chase's principal bank subsidiaries are JPMorgan Chase Bank, National Association, a national banking association with branches in 17 states, and Chase Bank USA, National Association, a national bank that is the Company's credit card issuing bank. JPMorgan Chase's principal non-banking subsidiary is J.P. Morgan Securities Inc., its United States investment banking firm.

The bank and non-bank subsidiaries of JPMorgan Chase operate nationally, as well as through overseas branches and subsidiaries, representative offices and subsidiary foreign banks. In May 2007, the Company acquired Xign Corporation. The business will be known as JPMorgan Xign Corporation. In January 2008, JPMorgan Chase acquired an additional equity interest in Highbridge Capital Management, LLC. As a result, the Company owns 77.5% of Highbridge as of January 31, 2008. On May 30, 2008, the Company acquired The Bear Stearns Companies Inc.

Technical Analysis

The intermediate term setup is showing a possible bottoming chart formation down to 33.70 to 34.23, which could provide an intermediate term low risk high reward reversal to the upside.

Longer term is another story, and with the current financial situations going on, we could see further downside short-term, intermediate-term, and very possible longer term. So, right now, I’m a seller of JP Morgan Chase.

Disclosure: Author holds a short position in JPM

Comments

[trw88:]

Why would the author even put a long term short target on JPM of roughly $31?

That represents a roughly 20% return. If you use a year as long term, it costs you 12% a year in margin interest and another 4% in dividends you have to pay.

IF he's right and meets his objective, you can make 4%, what you can get on a CD guaranteed.

On the other hand, he likes JPM long term. Why not collect the 4% plus dividend while you accumulate it - you would make the same as taking the risk to hold it short for a year? Seems like a better strategy to me.

I never understood shorting long term. Too risky, too expensive.

2008 Sep 01 06:21 AM

[jse17:]

"I never knew an investor that consistently made money using technical analysis," Sir John Templeton!

2008 Sep 01 09:43 AM

[tipalia:]

you are right on trw88! but greed is the source of trying to find something where there is nothing in the hope there might be something and if there is nothing.......??????? wow some people like to complicate simple things isn t it?
tipster

2008 Sep 01 10:29 AM

[flamorte:]

Unfortunately, many of the articles on the SeekingAlpha website cite technical analysis to support their hypotheses. Easy to do, easy to understand, however, not true to the concept underlying the financial term "alpha", which refers to the difference between a stock's expected return and its required return according to the security market line, a concept derived from the CAPM (capital asset pricing model). The CAPM is the precisely what moved Wall St. analysts away from technical analysis.

Technical analysis is not supported by quantitative evidence. There are some short-term qualtitative phenomenom well explained in the study of "behavioral finance". Most technical "analysis" is subject to selection bias, referencing, e.g., it always amazes me how the building head-and-shoulder became a "failed head-and shoulder", or how technical "analysts" use a wide range of moving averages, e.g. 45 day M.A. instead of a 50 day EMA, when it seems to support the conclusion they are looking for.

If you do not have the statistical skills to evaluate outcomes based on technical analysis, another approach is to take a look-back six months from now, at stories like this one on JPM. Do it, and you will learn that investing based on technical analysis does no better than chance, if that ...

As for the specifics of this story,well, the comments made before me are right on. Small investors pay high commissions and spreads relative to their small positions. They often do not use derivatives to limit their risks, (e.g. interest payment, timing ex-dividend ). Trying to time short-term short trades on relatively high-dividend stocks with strong insitutional support is a losers game.

2008 Sep 01 10:34 AM

[BudH:]

JPM is at a buy point now. Sell it when it gets into the mid 40's. Why is this article even on S.A.?

2008 Sep 01 11:58 AM

[Emerald:]

Not one mention or analysis of JPM's huge derivatives book. Buffett warned about this, but investors ignore it.

2008 Sep 01 12:44 PM

[DingDongDaddy:]

Any analysis of JPM should include a discussion of the $1.2 billion lawsuit pending in Texas against JPM, along with co-defendants PXD and an Australian company, filed by Mesa Offshore Trust (MOSH). Trial is scheduled for December.

2008 Sep 01 03:05 PM

[trw88:]

Emerald, the challenges Banks have are well known. Investors are all about risk and reward. Apparently they feel the liability is more or less reflected in the price.

JPM will survive this in better shape than just about any other financial institution out there. I agree with th author of this piece and apparently you as well that there may be downside risks in the short term. I am happy to hold it and collect the 4%, even if it takes several years to see this work out.

I think a better and more less risky strategy than shorting is to hold and collect the dividend and accumulate more on weakness.

I highly doubt the July lows will be seen again, but would be buying agressively under $35 if it gets there.

If you are a short term trader, there are better shorts out there than JPM in my opinion.

2008 Sep 02 07:18 AM

[John C. Lee:]

There are better shorts than JPM.

2008 Sep 02 08:34 PM

[investor88:]

In my view better to short JPM than long, but whether long or short there is nothing about JPM to get excited about.

2008 Sep 03 07:56 AM

[Iconoclast421:]

From a technical standpoint, JPM's chart tells me it is a screaming buy. Shrug. I cant easily bring myself to actually buy it though.

It really looks like the big dumb money is flooding into financials. Like sheep to the slaughter? Or self-fulfilling prophecy?

2008 Sep 03 11:32 AM

[GKM:]

Sir Templeton was a moron who was talking his own book. He didn't want investors using technical analysis and I wonder why...

Budh has it right on. The entry for the short isn't yet in my opinion.

2008 Sep 03 06:33 PM

[Michael Mic...:]

Update on our short position on JP Morgan in which our short was implemented before the SEC implemented the no naked short rule yesterday. We almost got stopped out on our tight stop-loss last week. We are still holding short looking for lower 30's to buy in. The carnage in the financials is not over yet. Someday we see it ending, but not just yet.

invest2success.blogspo...

2008 Sep 17 10:53 PM

[Michael Mic...:]

Our short position has been stopped out on JPM now. Looking for a pullback to go long on it possibly soon. Looks like the white knight of wall street is to the rescue to the rest of the out of money financials. invest2success.blogspo...

2008 Sep 29 02:33 AM