We're Downgrading This Holding After Strong Run and Overbought Condition

Leading up to this morning’s first-quarter earnings reports, we expected volatility in the stock market to benefit trading operations at Morgan Stanley (MS) and Bank of America (BAC) — and boy did it ever. That along with continued market-share gains in their respective investment management and investment banking businesses, led both Pro Portfolio holdings to deliver top-line and bottom-line beats.

While we await next week’s SpaceX analyst day to wrap our hands a bit further around the potential for that expected IPO later this quarter, the IPO waters will be tested this week with the pending transaction from Madison Air Solutions (MAIR). That offering for the HVAC company is, for the time being, slated to be the largest IPO this year as it looks to raise ~$2.2 billion.

Market volatility has remained in the current quarter, and we could very well see that continue as we move deeper into this earnings season. However, to drive meaningful upside to our existing MS and BAC price targets of $205 and $65, respectively, investment banking activity remains the key lever we’ll be watching. That means IPOs and secondary offerings, as well as M&A activity and other corporate advisory services. The expectation remains favorable given the slate of high-profile IPOs ahead of us, while the looser regulatory environment bodes well for further M&A activity. On top of that, the growing likelihood that the Fed doesn’t deliver a rate cut this year should help overall expectations for net interest income (NII).

Morgan Stanley

MS shares have had a nice run since bottoming in early March, and that more than 20% move has landed them back in an overbought condition. With that in mind, and less than 10% upside to our $205 target, which is well ahead of the Wall Street consensus at $190, we’re downgrading the shares to a Two rating from One.

Looking at the MS chart, we see several gaps have been created in April, and closing them also lines up with the stock’s 50-day moving average near $169. Subject to what develops in the IPO market in the coming days, MS shares may not pull back quite that far, but we’ll continue to monitor the shares for a favorable risk-to-reward entry point.

We’ll also lift our MS panic point to $160 from $145.

Bank of America

Turning to BAC shares, while their move over the last few weeks is a bit smaller at ~16%, they have also entered overbought territory. While there is sufficient upside remaining to our $65 target to maintain our One rating, that overbought condition means members who are underweight the shares should wait for a pullback.

The next level of support clocks in near $51, the 100-day moving average, but there is much stronger support between $50-$51, given the intersection of the 50 and 200-day moving averages.

In terms of our BAC panic point, we’ll nudge that up to $45 from $42.

At the time of publication, TheStreet Pro Portfolio was long BAC and MS.