I like buying stocks that are going up. If there is anything that the market has taught us over the past hundred years is that market prices trend. The major averages, individual sectors, stocks, commodities, currencies, interest rates, they all trend. Sometimes these are uptrends that last years or even decades, sometimes they’re downtrends, and sometimes there is no trend and it’s just a sideways mess. Remember, recognizing a lack of trend is just as important as the first two. What I like even more is while a stock is going up the sell side likes it less and less. It’s completely counter intuitive to us who specifically look for trends to follow. They don’t think like us as market participants because they have different motivations.
Here is a chart of J.P. Morgan stock. Plotted below price is the percentage of buy recommendations by wall street sell side analysts. Only 17 buys out of the 36 wall street firms who cover it. Notice how as prices break out of a 15-year base, the sell side hates it more and more taking $JPM off their buy lists:
By the time the sell side does all of their earnings revisions (that’s when they’re wrong and get to change their answers) the price of the stock has already ripped in their faces. Eventually they come around and chase price, which we have been following all along, and we’re selling it to them, or their clients for that matter. That’s the way this cycle works. And I’m not just speaking about myself, this is just the cycle of markets, with or without me. Regarding the strategy of fading sell side consensus, I don’t mean to pick on just them. Wall Street Economists are also a great consensus fade and newsletter writers are definitely excellent fades.
The reason the sell side is usually behind the curve is because they have other motivations. As market participants we have 1 goal: to make money. It really is just that simple for us. But for analysts and sell side firms, it’s different. There is career risk involved. To be that one guy with a sell recommendation when the other 37 firms have buys? You better be right or you’ll quickly be looking for a new job. So between the cushy salary, benefits for your wife who doesn’t work and kids, comfort of a nice career, what’s the point of risking all that? Just chase like everyone else when you’re wrong. So they tend to travel in herds, like a bunch of sheep.
As market participants we can take advantage of this conflict of interest. We know there’s a whole slew of wall street sell side analysts who have to raise price targets on JPM if this thing keeps ripping. So if you’re asking, who is left to buy? I’d say the most amount since 2009….
This chart above comes from a smart buddy of mine who prefers to remain nameless. We’ll call him Mr. T. But here is my personal chart of J.P. Morgan $JPM. To me, this looks like a breakout from a 15-year base. Any way you look at it, we’re making new all-time highs. If I’m writing down bearish characteristics for stocks, new all-time highs does not make it on that list. Momentum never hit oversold conditions when price made new lows over the past year. This is all structurally bullish and points to $110.
I have a funny feeling we’re going to be approaching that $110 at some point in the first half of next year. Considering how bearish the sell side has gotten as we break out to new highs, I think there is a lot of juice left to the upside. We want to be buyers of any and all dips, especially if we some how get down towards 80. Nothing suggests that will happen, but weakness here needs to be bought to take profits next year.
A lot of you guys know I’ve been talking about this one for a while. But for you knew comers, you can see here Nov 9th $JPM how positively correlated JP Morgan is with the S&P500 and has been for many years. I think if I’m right about JP Morgan stock, then the S&P500 is likely going a lot higher as well.
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Tags: $JPM $SPY