(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Morgan Stanley (MS) and Bank of America Corp. (BAC) shares got hammered during the market sell-off over the past couple of days. But they have recently started rebounding and could be set to rise based on technical analysis.
The stocks both fell by over 8 percent during the depth of the pullback, but have snapped back quickly. Both bank stocks should now continue their previous trends higher, with Bank of America potentially rising by about 28 percent, and Morgan Stanley by roughly 27 percent, from their closing price on February 6.
Morgan Stanley stock fell to a critical support level at roughly $51.50 during the recent stock market downturn, and found a meaningful bounce.
The decline also brought the relative strength index (RSI) lower from extremely overbought levels, back towards the lower end of the neutral range, into the high 30's. A reading below 30 shows the stock is oversold while a reading over 70 indicates shares are overbought. (See also: Overbought Or Oversold? Use The Relative Strength Index To Find Out.)
Should Morgan Stanley's stock be able to rise back above resistance at $55.25, it would be in a perfect position to continue its previous path higher toward $69. That's an increase of about 27 percent from the stock's closing price of $54.33 on February 6.
Bank of America
Bank of America has been heading toward $40 a share for some time, and should continue to head higher. The RSI for the stock, like Morgan Stanley, has also fallen from overbought levels back toward a neutral reading.
In an Investopedia article on October 23, we noted the initial breakout in Bank of America when the stock first rose over $25.50. (See more: Bank of America Could Rise Nearly 50%.) The stock faces minimal resistance, and that should give it a clear path to climb by 28 percent to roughly $40, from its closing price of $31.20 on February 6.
The two companies should also benefit from a steepening yield curve, which should help them improve on net interest income. The yield curve narrowed for most of 2017 as the Federal Reserve was raising short-term interest rates. But the long end of the curve had been stubbornly refusing to rise, with inflation not being a concern.
But over the past few weeks, 10-year Treasury rates have had a technical breakout, while inflation is beginning to show signs of life through rising oil prices and increasing wages. (See also: Why Surging Bond Yields Won’t Kill the Bull Market.)
Both Morgan Stanley and Bank of America got walloped earlier this week, but the overall technical setup remains strong, while a steepening yield curve may strengthen both companies' bottom lines.
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.