JPM, GS, SLF, and MFC – Update on “Coming Out of the Blue” Stocks

Throughout the last few months we highlighted four financial stocks, two US and two Canadian, that we observed breaking up through EBV-3.  We pejoratively call this “Coming out of the Blue”.  Let’s review our model price charts for each company and make some observations.

JP Morgan (JPM)

JP Morgan with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of JPM subsequent to this post will be maintained on Facebook, here.

This is what we said on March 9, 2012 (here) when JPM transited above EBV-3.

“A trader/investor should always keep an eye on transits up through EBV-3.  We call this “Coming out of the blue” as the title of this piece suggests.  Why?  Subsequent to an upward transit of EBV-3, stocks tend to have powerful moves, price wise, that can take a stock from EBV-3 to at least EBV, or EBV+2.  Sometimes investors, if patient, can ride their winners all the way to EBV+5.”

“We look for “break out/pull backs”, for higher probability trades.  This occurs when a stock transits above EBV-3, then pulls back under, then breaks above again over a period of weeks/months.  To us this means the market is undecided in terms of the price action which zone the stock belongs.  When the market does decide to stay above EBV-3, could be along side of news and/or corporate action, the price action is very positive.”

On March 13, 2012 JP Morgan passed the Fed’s stress test.  Once JPM passed the test, they boosted their dividend by 20% and announced a $15 billion dollar stock buyback.  This does qualify as news and/or corporate action stated above.

What Happens Now to JPM?

As we stated above  “Subsequent to an upward transit of EBV-3, stocks tend to have powerful moves, price wise, that can take a stock from EBV-3 to at least EBV, or EBV+2.”  On the positive side, the issue is not that JPM will go to EBV, but how long will it take to get there.  On the negative side, if there were a correction, support would be EBV-3, which would present a good buying opportunity for those missing the first transit through.

Goldman Sachs (GS)

Goldman Sachs with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of GS subsequent to this post will be maintained on Facebook, here.

We wrote about Goldman Sachs (GS) on February 5, 2012 (here) when GS broke above EBV-3.  Goldman spent about six weeks trading in and around EBV-3 before the March 13th announcement on the Fed’s stress test results.  Since March 13, GS has lifted nicely off of EBV-3.

What Happens Now to GS?

Identical to the JPM scenario we outlined above.  On the positive side, the issue is not that GS will go to EBV, but how long will it take to get there.  Again, on the negative side EBV-3, $116.71, is support and if GS were to correct to this level this would be an excellent entry point for those who missed GS the first time.

Sun Life Financial (SLF)

Sun Life Financial with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of SLF subsequent to this post will be maintained on Facebook, here.

We wrote about Sun Life (SLF) back on February 28, 2012, here.  SLF reported under IFRS reporting, Canadian rules, which has been much anticipated by market participants.  The market waited at EBV-3 until the year-end financials were released.  Once released, the market and buyers were buoyed thinking the worst was over for SLF in terms of write-downs or any other accounting surprises.  Also, with positive market reaction to the Fed’s stress test results on US bank owned holding companies helped SLF in the last couple of weeks or so.

What Happens Now to SLF?

You guessed it!  Even though SLF has almost reached EBV-2, any correction to EBV-3 would be a good opportunity for investors.

Manulife Financial (MFC)

Manulife Financial with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of MFC subsequent to this post will be maintained on Facebook, here.

Yes, we know this is getting boring.  MFC occurred quickly, transiting above EBV-3, with resulting gains.  We wrote about MFC on March 15, 2012, here.  Financials tend to move together and MFC is no exception.

What Happens Now to MFC?

You guessed again!

Closing Comments

If you notice in all of the charts posted, model price is below our target price.  So you may ask, why didn’t we use model price as our target price?  Financials are different than standard operating business in many ways.  This post is getting too long to go into all the differences however suffice to say this is a balance sheet story not an earnings story.  Asset quality is increasing and this is what the market is reflecting to investors.

Also we could have written up other US financials, Capital One Financial and Bank of NY Mellon come to mind.  As we have said in a previous post, “if it rains, it pours”.  We had many names, in the financial space, transited at the same time and their charts look similar to the ones we highlighted. We will keep an eye on Citi (C) and Bank of America (BAC), these two have yet to transit.  Positive transits in these two will be a big event in terms of asset quality for all financials and the US market as a whole.

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