Wells Fargo & Company (WFC) missed earnings per share (EPS) estimates in each of the past four quarters. The stock bottomed at $22.00 on May 13, but its weekly chart remains negative.
The stock is down 54.3% year to date and in bear market territory at 55.1% below its 52-week high of $54.75 set on Nov. 29. The stock is up 11.7% from its May 13 low of $22.00.
Wells Fargo stock has a P/E ratio of 20.79 and a dividend yield of 8.18%, according to Macrotrends. The bank is the third largest of the four money center banks that are considered too big to fail.
The status of the banking system based upon FDIC data for the first qauarter of 2020
The Federal Deposit Insurance Corporation (FDIC) Quarterly Banking Profile (QBP) for the first quarter of 2020 shows that the Deposit Insurance Fund (DIF) has $110.3 billion in assets to protect $8.17 trillion of insured deposits. The QBP shows that total real estate loans rose totaled $4.19 trillion in the first quarter, still 0.7% below the level at the end of 2007. Real estate lending is thus a drag on the U.S. economy.
Most notable is that home equity loans have been declining in every quarter since the end of 2007, despite the re-inflated bubble for home prices. This category of lending is down 43.7% since the end of 2007. Construction and development loans to fund new communities and homebuilders, while rising in recent quarters, are still down 42.5% since the end of 2007. The loan category to worry about now is nonfarm nonresidential loans, which are up 56.3% since the end of 2007. This is where problem loans could hurt the banking system.
The daily chart for Wells Fargo
The daily chart for Wells Fargo shows the formation of a death cross on March 4, when the 50-day simple moving average fell below the 200-day simple moving average to indicate that lower prices would follow. This sell signal tracked the stock to its May 13 low of $22.00.
The stock is trading between its monthly value level at $22.03 and its quarterly risky level at $28.65. The 50-day and 200-day simple moving averages are $26.39 and $39.57, respectively.
The weekly chart for Wells Fargo
The weekly chart for Wells Fargo is negative, with the stock below its five-week modified moving average at $26.36. The stock is below its 200-week simple moving average, or reversion to the mean, at $49.96.
The 12 x 3 x 3 weekly slow stochastic reading is projected to slip to 31.64 this week, down from 32.87 on July 17. During the week of May 22, this reading was below 10.00, making the stock technically too cheap to Ignore. At its January high, this reading was above 90.00, which had the stock in an inflating parabolic bubble formation. This led to the bear market decline.
Trading strategy: Buy Wells Fargo stock on weakness to the monthly value level at $22.03. Reduce holdings on strength to the quarterly risky level at $28.65.
How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. The annual levels remain on the charts. The monthly level for July was based upon the last nine monthly closes, the third quarter level was based upon the last nine quarterly closes, and the second half 2020 level was based upon the last nine mid-year closes. New weekly levels are calculated after the end of each week.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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