JP MORGAN CHASE SUFFERS DOWNSIDE REVERSAL ON FRIDAY... Friday had to be a very discouraging day for investors in bank stocks. After reporting first quarter earnings that were much higher than expected, bank stocks opened higher before plunging in heavy trading. Chart 1 shows JP Morgan Chase (JPM) suffering a big downside reversal (in very heavy trading) which put it back below its 50-day moving average. Bank stocks lost 2.4% during the day which made financial stocks the day's weakest sector (-1.5%). Chart readers don't usually follow earnings very closely, but we do pay attention to how stocks react to those earnings. Wall Street analysts have been telling us for weeks that a strong earnings season would be enough to push the stock market higher. Friday's weak reaction to strong bank earnings may cast some doubt on that reasoning. Chart 2 shows the Financial Sector SPDR (XLF) failing back sharply from its 50-day average. Despite Friday's weak performance, financials still gained about 1% for the week.
MAJOR STOCKS INDEXES BACK OFF FROM 50-DAY MOVING AVERAGES ... Financial stocks are the second biggest sector in the S&P 500 (17%) which is second only to technology's weighting of 23%. As a result, Friday's financial selling took a toll on the rest of the market. Chart 3 shows the Dow Industrials pulling back from a test of its 50-day average on Friday. Charts 4 and 5 show the S&P 500 and Nasdaq Composite indexes doing the same. The only positive factor was that trading volume was the lowest of the year. Then again, trading for the entire week was also one of the lowest of the year. That suggests that traders and investors don't have too much conviction one way or the other. So it looks like a battle of moving averages is taking shape. The ability of major stock indexes to say above their 200-day moving averages has kept the market's major uptrend intact. But they need to clear their 50-day averages to signal that stronger gains lie ahead. They weren't able to do that this past week. So more testing of the two moving averages lines may be in store. Sooner or later, one of them will have to be broken.