(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Shares of Morgan Stanley (MS) are already down nearly 10% for 2018, and almost 20% off their March highs. But the outlook for the stock may be even bleaker, with some traders betting shares of the investment bank fall another 8% by the middle of October. If that happened, the stock would be down nearly 27% from its intraday highs of $59.22 on March 13. (For more, see also: Morgan Stanley Stock May Fall 9% as Profits Sputter.)
The technical chart suggests the stock has further to fall as well, and implies the stock falling by a high amount over the coming weeks. Adding insult to injury, of the 18 biggest banks tested in the Federal Reserve’s annual stress test, 15 banks were allowed to raise their payouts, while three had to leave them at last year’s levels. Morgan Stanley was one of the three.
Options traders have been growing increasingly more bearish on the bank in recent weeks. The options set to expire on October 19, have seen traders building their positions in the $45 strike price puts. The options trade at a price of roughly $1.45 per contract, and for a buyer of those puts to break even, the value of the stock would need to decline to $43.55, if the options are held until expiration, a drop of 8% from its current price of $47.40 on June 29. The open interest level for the puts has climbed to about 12,000 contracts, nearly doubling just since June 19.
It isn't just the options that are pointing to a stock that is due to fall; the technical charts also support the bearish outlook. The stock is sitting just above a critical technical support level at $47.30 and should the stock fall below that price; shares could fall all the way to the next level of technical support at $44.10. Volume levels have been steadily increasing in recent days as shares have continued to decline. It would suggest more selling interest is moving into the stock.
The relative strength index (RSI) has been trending lower since mid-March and despite hitting oversold levels at 30, the RSI has yet to indicate the stock has put in a bottom.
Since the beginning of June, analysts have started trimming their outlook for 2019, with both revenue and earnings falling by about 50 basis points. It is not an alarming reduction, but it is indeed a change in trend, which had steadily been calling for stronger results.
The outlook for the stock based on the options market and technical chart would suggest the stock has more to fall in the coming weeks. But with quarterly earnings results coming in just a few weeks’ time, that outlook may change at a moment’s notice.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.