Investment banking and wealth management giant Morgan Stanley (MS) reported better-than-expected fourth quarter earnings before the open on Thursday, Jan. 16. The stock gapped 5.8% higher at the open this morning and then continued higher to $57.36 in afternoon trading.
Morgan Stanley stock is in an "inflating parabolic bubble" on its weekly chart. My strategy is to protect gains by employing a sell stop on a weekly close below its semiannual pivot at $56.71. Otherwise, the upside is to the stock's annual risky level at $64.36.
Morgan Stanley reported solid results from its wealth management division, which does not surprise me. Between 1990 and 1995, I was the chief market strategist for the U.S. Treasury trading desk at Smith Barney. Back then, there was a middle market sales group that covered small institutions and high-net-worth individuals. This group is now part of the wealth management team at Morgan Stanley.
At $57.00 per share, Morgan Stanley stock is up 11.5% year to date and in bull market territory at 47% above its Aug. 15, 2019, low of $38.76. The stock is also consolidating a bear market decline. Morgan Stanley shares traded as high as $59.38 during the week of March 16, 2018, and then declined 38% to a low of $36.74 during the week of Dec. 28, 2018.
The stock is up 16.2% year to date and in bull market territory at 25.4% above its Dec. 24 low of $36.74. The stock is also in bear market territory at 22.4% below its March 12, 2018, intraday high of $59.38. Morgan Stanley's bull market is thus consolidating its longer-term bear market.
In my coverage of Morgan Stanley over the years, I always considered the performance of its wealth management businesses as the wildcard. This continues with the stock reasonably priced fundamentally. Its P/E ratio is 11.75 with a dividend yield of 2.65%, according to Macrotrends.
Morgan Stanley is one of the primary dealers that have business relationships with the New York Federal Reserve Open Market Trading Desk and put their firms' capital at risk as underwriters of new U.S. Treasuries.
The daily chart for Morgan Stanley
The daily chart for Morgan Stanley shows that the stock moved sideways for the first three quarters of 2019. A positive reaction to earnings reported on Oct. 17 began the rally that continues today. A "golden cross" formed on Nov. 5, when the 50-day simple moving average rose above the 200-day simple moving average. This buy signal indicated that higher prices would follow.
A positive for this morning's earnings beat was the fact that the stock held its weekly pivot at $52.38 at the close on Jan. 15. This indicated upside potential to its semiannual risky level at $56.71, and the stock is now above this level as a pivot. These levels are the top two horizontal lines on the chart. The annual risky level is above the chart at $64.36. The lower two horizontal lines are its monthly and quarterly value levels at $43.08 and $40.53, respectively.
The weekly chart for Morgan Stanley
The weekly chart for Morgan Stanley is positive but extremely overbought, with the stock above its five-week modified moving average of $51.52. The stock is above its 200-week simple moving average, or "reversion to the mean," at $43.66, last tested during the week of Oct. 18, when the average was a buy at $42.12.
The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week rising to 94.62. This is well above the overbought threshold of 80.00 and above the 90.00 threshold in an "inflating parabolic bubble" formation.
Trading strategy: Protect gains by employing a sell stop on a weekly close below the semiannual pivot at $56.71.
How to use my value levels and risky levels: The closing prices of stocks on Dec. 31, 2019, were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual, and annual levels. Each calculation uses the last nine closes in these time horizons. New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.
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 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 typically is 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.