Pricing a pullback

09/26/19
  • Morgan Stanley (MS) pulled back around 6% over the past week
  • Stock rallied more than 15% between August 15 and September 13
  • Shares jumped yesterday amid high put–call ratio

In mid-August “Financial stocks nearing inflection point?” discussed the possibility of a rebound in beaten-down financials as yield-curve-inversion anxiety was knocking the sector particularly hard. And over the past month, financials have been the second-strongest S&P 500 (SPX) sector (up around 8%), and banks have been the strongest subsector, up more than 11%.

End of the story? Not quite.

Along with the rest of the market, financial stocks mostly turned lower over the past week (after the S&P financial sector ETF came within 5 cents of its all-time high last Thursday, by the way), including Morgan Stanley (MS), which yesterday morning popped up on a LiveAction scan for stocks with high put–call ratios:

LiveAction scan: Highest put/call ratio. MS put volume nearly five times call volume.

Source: Power E*TRADE


At the time, MS put options volume was around 4.7 times as much as call options volume. Although unusually high put volume can mean investors are buying lots of put options to protect themselves against perceived downside, traders often use the put/call ratio as a contrarian indicator, since put volume often spikes during sharp sell-offs when investors are panicking.

A daily chart of MS shows a couple of interesting recent developments—a sharp sell-off (around -2.5%) on Tuesday, and a slightly lower low yesterday followed by an intraday rebound of more than 1%:

Morgan Stanley (MS), 4/25/19–9/25/19. Morgan Stanley (MS) price chart. Tuesday-Wednesday turnaround.

Source: Power E*TRADE


Also, the stock’s recent pullback, which followed a 15.5% rally from August 15 to September 13, was unfolding just as MS was receiving a couple of analyst recommendations and upgrades, including from Goldman Sachs and Citigroup, the latter suggesting that MS weakness was an opportunity buy a stock with limited exposure to interest rates.1

For some traders, a nearly 6% pullback since September 13 (and a roughly 50% retracement of the August 13–September 13 rally) would qualify as weakness. That discount was a little smaller after yesterday’s rally, but traders anticipating a near-term challenge to the July–September highs may not be inclined to quibble.

From a purely quant perspective, there’s some evidence that the stock’s Tuesday–Wednesday turnaround has the potential for upside follow-through: Since 1993 MS has had 209 other 1%-plus up days that followed -2%-plus down days (while making a five-day low in the process). The stock was higher five days later 58% of the time with an average gain of 1.7%.2

A single piece of information doesn’t mean anything, of course, but when several pieces come together, traders often take notice.

Market Mover Update: Zoom Video Communications (ZM) fell more than 2% yesterday, but it rallied well off its low after testing the support of its September 10 low (see “Trading beyond the IPO”).

Today’s numbers (all times ET): GDP (8:30 a.m.), International Trade in Goods (8:30 a.m.), Corporate Profits (8:30 a.m.), Retail Inventories (8:30 a.m.), Wholesale Inventories (8:30 a.m.), Pending Home Sales Index (10:00 a.m.), EIA Natural Gas Report (10:30 a.m.). Fed speeches: Robert Kaplan (9:30 a.m.), James Bullard (10:00 a.m.), Richard Clarida (11:45 a.m.), Mary Daly (11:45 a.m.), Neel Kashkari (2:00 p.m.).

Today’s earnings include: Accenture (ACN), Conagra Brands (CAG), FactSet Research Systems (FDS), Micron Technology (MU), Carnival (CCL).

 

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1 TipRanks. Goldman Sachs: 5 Strong Value Stocks To Buy Now. 9/22/19.

2 Supporting document available upon request.

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