Are big banks in big trouble?

With earnings reports and possible credit downgrades looming ahead, big bank stocks will need to weather short-term headwinds.

By MoneyShow.com Apr 10, 2012 12:30PM

Image: Bank Vault (© Radius Images/Jupiterimages)By Tom Aspray


Alcoa, Inc. (AA) is set to kick off earnings season after the close Tuesday, but many investors are even more interested in the earnings from the big banks. The focus intensified in late March when ratings agency Moody's said it would decide in mid-May whether to lower the credit ratings of 17 global financial companies.


The most vulnerable seems to be Morgan Stanley (MS), which could have its credit rating lowered to well below that of main rival JPMorgan Chase (JPM). Bank of America (BAC) and Citigroup, Inc. (C) are also being watched closely.


A credit downgrade could have a serious impact on future earnings, as the banks would be required to put up more in collateral to back trading contracts. They also could lose business from some of the large mutual funds, which may be restricted from doing business with firms who have lower credit ratings.


JPMorgan Chase (JPM) will be the first of the big banks to report earnings, with the announcement due before the opening on Friday, April 13. The other three will report earnings next week. 


The shares of all four of these banks have corrected from the March highs, and identifying the important support levels before the upcoming earnings reports could give some clues about how the stocks will fare over the next few months.

Click to enlarge


Chart Analysis: Bank of America was one of the first quarter's star performers, but the stock is down 11% from the March high of $10.10. The 38.2% Fibonacci retracement support is at $8.13.

  • The chart has important chart support at $7.52, which also corresponds to the 50% retracement level
  • Clearly, the 61.8% support at $6.90 needs to hold on any correction
  • On-balance volume (OBV) has been acting stronger than prices and has not dropped far below its highs
  • OBV is now testing its weighted moving average (WMA) and has first support at the uptrend, line b. The longer-term support, line c, goes back to the positive divergence that formed in December
  • Initial resistance for BAC is now in the $9.35-$9.80 area

Citigroup is also down 11% from its highs, and the daily chart looks much less positive than that of Bank of America.

  • Citigroup is already reaching its first area of chart support, with the 38.2% Fibonacci retracement support at $31.94
  • The more important 50% support is at $29.93 with the daily uptrend, line d, in the $28.60 area
  • Daily OBV has dropped below its weighted moving average but is still well above the support from both its February and March lows. A drop below those support levels would weaken the outlook
  • Volume has been low on the recent decline and the OBV is well above support at line e
  • There is initial resistance now at $34.80-$35.50 with stronger resistance now at $36.50-$37

Morgan Stanley is reportedly in danger of having its credit rating dropped three notches, which would put it well below the credit rating of both Goldman Sachs and JPMorgan Chase.

  • The daily uptrend, line a, was broken over the past two days, and MS is already close to the 38.2% Fibonacci retracement support at $17.51
  • More important 50% support is at $16.37 with the longer-term uptrend, line b, at $16
  • Daily OBV formed a negative divergence at the recent highs, line c, and has now violated support at line d
  • A break of the longer-term OBV support at line e would be more negative
  • The daily chart has a band of resistance in the $18.50-$19.40 area and more important resistance above $20

JPMorgan Chase could also be downgraded although it currently has the highest credit ranking of these four big banks. JPM peaked on March 27 at $46.49 and is now down 5.6% from those highs.

  • The daily uptrend, line e, is now at $40.80 with the 38.2% retracement support at $39.46
  • The late-October high and the 50% retracement support are in the $37.54-$37.29 area
  • Daily OBV has dropped back below its weighted moving average but has long-term support at line g
  • JPM currently yields 2.7%, which is considerably more than the other three banks
  • First resistance is now at $44.70-$45.40 with stronger resistance at $46

What It Means: The financial stocks will likely play an important role in moving the markets higher once the current correction is over. After the impressive first-quarter performance, I expect to see a drop at least back to the 38.2% support levels. The volume has been low on the recent decline, which is a positive sign.


Since several of these bank stocks are already down more than 10% from the recent highs, a rebound is becoming more likely. It will be important to see if the volume expands on the next rally, because that would be a positive sign.


How to Profit: There are no new buy recommendations for now, but for those who are currently long Morgan Stanley, consider lightening up on that position on any move back to the $19-$19.40 area since that stock looks the most vulnerable of the group.


JPMorgan Chase, on the other hand, looks the most interesting, and I will be watching it closely if it gets back to the $39.50 area.

24Comments
Apr 10, 2012 1:52PM
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the USA Credit Rating downgrade already happened, we are AA only not AA+ anymore it happened last week and President obama told the news channels not to spill the news so no one gets scared , for crying out load!!! when will people understand we are in big trouble....and we are bound to see it pretty soon
Apr 10, 2012 5:33PM
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Big Banks facing headwinds?  If they don't get busy investing in American JOBS and economy, the Big Banks are going to be facing a hurricane that puts their little boat down at the bottom of the big blue sea.  A vault full of funny money isn't going to be funny, when the economy tanks.
Apr 10, 2012 4:23PM
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I hear inside info that this year the market will drop over thousand points.

 

get your money out bfore the scum banks rip u off.

Apr 10, 2012 5:51PM
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The big corporations and banks have to feel this! they need to understand if you put everyone in america out of work and ship all of our cash to china, we are screwed! it don't take a genius to figure that out !
Apr 10, 2012 4:26PM
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Of course, we are in huge trouble.  The "fantasy" is it will absolutely never be admitted by this administration.  John Carney is a total joke in his 'coverups' and is beginning to look very stupid, trying. He is probably going ....why the h did I get into this? There are lot's of gen X'rs that are news pundits...wishing for the "hopeful betterment" which is not happening....going, 'oh crappola'!  And, they are on both sides of the news media conservative and liberal. Get ready as this is soon home to 'roost' and has nothing to do with the 'markets' that all know are manipulated and have been.  This time it is 'crisis'.  Yeah, future generations will be fine!  Not one chance as they are not independent thinkers and have not a capacity other than a "machine"...called a computer.   
Apr 10, 2012 5:56PM
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its good to see that big banks get a credit rating , like we do
Apr 10, 2012 7:16PM
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Cold hard cash will always be king and it helps me to live within my means. 

Apr 10, 2012 8:06PM
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Whose fault is it !?! The Republicans! The Democrats! Yes, it's both parties, moron.

 

Apr 10, 2012 7:55PM
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Do ya think they really care? They all still get a bonus.
Apr 10, 2012 6:27PM
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I am all for America needing to wake up and live within our means, and quit with this continued barrowing (and spending).... But I am curious just like Graham Walker... Tina860, where are you getting your facts??

 

Your really smart neighbor that graduated high school, in the trailer next to yours, doesn't count. We are still a AA+, and if you, for a second, believe the president could just "talk" to the media to not report on another credit decline.....well that's just incredibly stupid.

 

I love a good made up story. But at least make it believable.

Apr 10, 2012 7:14PM
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Mr. Walker,

Don't forget how much money the Fed printed diluting the dollar since oil was last $120 a bbl. A $120 then is probably only worth $102 now!

Apr 10, 2012 8:16PM
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I can hardly wait for the first Republican Congressman to suggest another bailout for the banks.  Should be soon. wow, will that crank up the bloggers on all sides of the issue.
Apr 10, 2012 6:15PM
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They should have been prosecuted a long time ago, instead of the corrupt corporate puppets protecting them and FORCING the 99% American People to bail them out! The SAME PEOPLE THEY HAD BEEN STEALING FROM!!

99% American People, VOTE STRAIGHT DEMOCRATIC, the life you save may be your OWN!!
And if this Democratic Party doesn't serve us, we'll install one that will!!

Apr 10, 2012 8:03PM
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Graham Walker you should do a google search for the current US credit rating! Lol. On April 5, 2012, Egan Jones credit rating firm downgraded the US credit rating from AA+ to AA. Let me know if you need any help finding it, moron.

 

Apr 10, 2012 7:44PM
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I am all for America needing to wake up and live within our means, and quit with this continued barrowing (and spending).... But I am curious just like Graham Walker... Tina860, where are you getting your facts??

 

Your really smart neighbor that graduated high school, in the trailer next to yours, doesn't count. We are still a AA+, and if you, for a second, believe the president could just "talk" to the media to not report on another credit decline.....well that's just incredibly stupid.

 

I love a good made up story. But at least make it believable.

 

Apparently, areuseriousB, lives under a rock. Did you not see the announcement on April 5, 2012 by Egan Jones credit rating firm? The announcement downgraded the United States from a AA+ to AA citing a lack of progress in cutting the mounting federal debt. So before you start degrading others, maybe you should quit relying on the mainstream media, that is owned by big corporations who buy our elected officials, and do some research!

Apr 10, 2012 7:07PM
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Exactly!  More crap for our slave nation.  At least Syruan's aren't afraid to stand up.  Not like panty-boy Merikans
Apr 10, 2012 8:32PM
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Actually, areuserious, I was calling Graham a moron, but if the shoe fits wear it.

 

Although Egan Jones is not one of the recognized Big 3 credit ratings firms, they are 1 of only 9 recognized credit rating firms with NRSRO status. And who was the first credit rating firm to downgrade the US from AAA to AA+? Hmmmm...Egan Jones. They are supported by investors not the issuers.

 

So why don't you just crawl back under your rock or bury your head in the sand and tell yourself that everything will be hunky dory.

Apr 10, 2012 8:11PM
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Ill be mopattycakes calls me a moron.

 

Apr 10, 2012 8:06PM
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Yes mopattycakes, Egan-Jones is the neighbor that graduated high school and has a trailer next to Tina860. If a small, no name credit agency is trying to create publicity for themselves by being the only one (and there are hundreds) to down grade the American credit score, by all means believe them. It's still not a fact and will not affect any interest increases for borrowing by America, or restrict America from borrowing money.

 

For me I'll stick to the world recognized top 3 credit rating agencies. Moody's, Fitch and Standard and Poor's. Which 2 of the 3 still have America at AAA, and do effect America's borrowing power and credit rating.

 

Now back to my rock.

Apr 11, 2012 11:53AM
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Wake up people-Wall Street determines prices-Wall Street Manipulates the Market !

SUPPLY & DEMAND are a thing of the past. CSPAN video of Pelosi and panel have proof that Wall Street is setting the prices-not supply & demand AND the panel concluded Wall Street Traders are doing the same thing to manipulate Gas/Oil prices-that they did to the Housing Sector & CRASH our entire ECONOMY.

haha our awesome Govt.- were supposedly planning immediate action ?!?!?!
Nothing mentioned in MSM-or from the White House-Dems. & Repubs.

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