Morgan Stanley (MS - Get Report) reports earnings on Wednesday, April 17, with the stock in bull market territory since Dec. 24, but in bear market territory since its March 2018 high. My call is to buy weakness to semiannual and annual pivots at $41.77 and $41.73, respectively, which have been magnets since Jan. 7. The upside is to its quarterly risky level at $49.87.
Earnings from the finance sector have been mixed so far this earnings season. Overall the banking system has been stable but it's been hard to sustain gains post earnings. The business model for Morgan Stanley matches that for Goldman Sachs Group (GS - Get Report) . Goldman was poised for an upside breakout, but instead slipped on an earnings disappointment. I discussed this dynamic in "How to Trade Goldman Sachs as it Achieves Key Levels." Morgan Stanley has not pulled back from reacting to more positive expectations.
Morgan Stanley is up 16.2% year to date and in bull market territory 25.4% above its Dec. 24 low of $36.74. The stock is also in bear market territory, 22.4% below its March 12, 2018 intraday high of $59.38. Morgan Stanley's bull market is thus a consolidation of its longer-term bear market.
Analysts expect Morgan Stanley to earn $1.17 per share when it reports before the opening bell Wednesday. The stock is cheap with a P/E ratio of 10.04 and a dividend yield of 2.57%. Like most of the major financial companies, trading income will likely be disappointing. Wall Street is looking for slower client activity in the first quarter. The global slowdown and uncertainties on Brexit and the China trade war will be factors on the international side of their ledgers. In my opinion, a positive outlook for their wealth management businesses could be a wildcard.
The Morgan Stanley Bank is monitored by the Federal Deposit Insurance Corporation, and the Quarterly Banking Profile for the fourth quarter shows that the bank had $225.0 billion in total assets. This is up from $213.4 billion shown in the third-quarter QBP, which should be a positive.
Morgan Stanley is one of the Primary Dealers who have business relationships with the New York Federal Reserve Open Market Trading Desk, so they put their firms' capital at risk as underwriters of new U.S. Treasuries.
The Daily Chart for Morgan Stanley
Courtesy of Refinitiv XENITH
The daily chart for Morgan Stanley shows the formation of a "death cross" on June 26, when the 50-day simple moving average declined below the 200-day simple moving average, indicating that lower prices lie ahead. This negative signal was still in play when the stock traded as low as $36.74 on Dec. 24. The close of $39.65 on Dec. 31 was an important input to my proprietary analytics. The annual and semiannual pivots are $41.73 and $41.77, respectively. The close at $42.20 on March 29 was another important input to my analytics. This resulted in a monthly value level at $36.95 and a quarterly risky level at $49.87.
The Weekly Chart for Morgan Stanley
Courtesy of Refinitiv XENITH
The weekly chart for Morgan Stanley is positive, with the stock above its five-week modified moving average of $41.61. The stock is above its 200-week simple moving average or "reversion to the mean" at $41.05. The 12x3x3 weekly slow stochastic reading is projected to end this week rising to 73.73 up from 64.44 on April 12.
Trading Strategy: Buy weakness to its semiannual and annual pivots at $41.77 and $41.73, respectively, and reduce holdings on strength to the quarterly risky level at $49.87.
How to use my value levels and risky levels:
Value levels and risky levels are based on the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based on the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February and March. The quarterly level was changed at the end of March. 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 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 its time horizon expires.