Beware Morgan Stanley’s Red-Hot Rally

by Dan Burrows | September 10, 2012 12:59 pm

The return of the risk-on trade in late July did wonders for financial stocks, none more so than beleaguered investment bank Morgan Stanley (NYSE:MS[1]). Now, thanks to a couple of prominent analyst upgrades, shares have gone positively vertical in September.

All of which makes MS more susceptible to a steeper slide when the risk-off trade comes roaring back.

Sure, if you’re bullish on the prospects for the risk-on trade for a good while longer, buy the financials, by all means. They’re as sensitive a pro-cyclical sector as there is. That’s why financials have been the best performing sector of the S&P 500 over the last month, rising 3.6%.

Indeed, ever since European Central Bank President Mario Draghi unleashed the risk-on trade with his late July commitment to do “whatever it takes” to save the euro, the benchmark Financial Select Sector SPDR ETF (NYSE:XLF[2]) has rallied more than 10%, outpacing the broader market by about 3 percentage points.

Just don’t be surprised when the trade reverses, especially if you’ve been stock-picking with any equity that’s gone this far, this fast.

Morgan Stanley managed rocket-like liftoff a couple months after its botched handling of the Facebook (NASDAQ:FB[3]) IPO. MS is up 33% since the late-July risk-on rally began in earnest. In September alone, the stock is up about 13%.

Here are some company-specific things that have helped:

But what really got Morgan Stanley shares moving this month were a couple of influential upgrades. Mike Mayo, an iconoclastic and widely respected bank analyst at CLSA, last week lifted MS to outperform (buy, essentially), and hiked his price target to $23 from $16.

JPMorgan Chase (NYSE:JPM[5]) analyst Kian Abouhossein likewise upgraded MS last week, to overweight (again, buy, essentially).

Too bad the easy money looks to have been made. MS dropped as much as 2% Monday while the XLF slipped factionally.

Market timing is folly in the best of times. The risk-on trade will eventually stumble on something, whether it’s selling the news of more QE3 from the Federal Reserve later this week or a current-quarter earnings recession.

If you’re an active trader, ride the broader financial sector, if you must, but it’s probably already too late to pounce on Morgan Stanley. Monday’s sell-off looks more like a warning than a buying opportunity.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

  1. MS:
  2. XLF:
  3. FB:
  4. smaller axe to the bank’s credit rating:
  5. JPM:

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