Big Bank Stock Set to Slide

Bank stocks will be in focus when the Fed meets next week

by Karee Venema

Published on Jul 25, 2019 at 2:25 PM

Morgan Stanley (NYSE:MS) has edged higher in recent weeks, boosted by a positive earnings reactions and dividend excitement following the Fed's annual stress tests. This modest bounce now has the bank shares trading near a trendline that's had bearish implications in the past, which could put them on track to resume their longer-term downtrend.

Specifically, MS stock is within one standard deviation of its 320-day moving average, after a notable stretch below it. According to Schaeffer's Senior Quantitative Analyst Rocky White, there have been two other times in the past three years the equity has tested resistance at this trendline, resulting in an average one-month loss of 6.1%, with neither return positive.

Based on its current perch at $44.80 -- down 1.5% on the day -- another move of this magnitude would put MS back near its early June lows by Labor Day. More broadly speaking, the security is down more than 12% year-over-year, and could see pressure next week if the Fed cuts interest rates, as banks usually feel heat from lower rates.

Should the financial shares continue to retreat, a round of downgrades and/or price-target cuts could pressure them even lower. For starters, 70% of covering analysts maintain a "strong buy" rating on Morgan Stanley stock, while the average 12-month price target of $53.62 is a 20% premium to current trading levels.

Plus, peak front-month open interest of more than 9,200 contracts is perched just overhead at the August 45 call. This could create an options-related ceiling for MS, as the hedges related to these bets unwind ahead of expiration at the close on Friday, Aug. 16.

Those wanting to bet on more downside for the bank stock may want to consider doing so with short-term options, which are pricing in unusually low volatility expectations in the wake of the big bank's earnings report. This is based on MS stock's Schaeffer's Volatility Index (SVI) of 19%, which registers in the 3rd percentile of its annual range.

ms stock daily price chart on july 25

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