Goldman, Morgan Stanley in Bear Market Squeeze

Investment banking giant The Goldman Sachs Group, Inc. (GS) is a member of the Dow Jones Industrial Average and is in bear market territory at 26.5% below its all-time intraday high of $275.31 set on March 12. The diversified investment banking giant Morgan Stanley (MS) is also in bear market territory at 26.5% below its 2018 intraday high of $59.38, also set on March 12.

Why are these financial giants in the hole?

One reason is the global debt story! Goldman Sachs and Morgan Stanley likely have exposures around the world. According to data from sources including the IMF, global debt totaled $233 trillion at the end of the third quarter.

Non-financial corporate debt totals $68 trillion. Corporations around the world including U.S. corporations raised cash via bond offerings so they could increase dividends and step up share buyback programs. As debts mature, they will be squeezed by higher interest rates and wider spreads versus U.S. Treasuries.

Government debt totals $63 trillion. Many countries have dollar-denominated debt and a significantly weaker local currency, which is a dangerous combination. Dollar-debt in countries with emerging currencies requires a conversion of more local currency. In the U.S., debt now exceeds $21 trillion, but this does not include debt of Fannie Mae and Freddie Mac, which likely exceeds $5 trillion. Both Goldman and Morgan Stanley are primary dealers and thus underwriters for U.S. government debt.

Financial sector debt totals $58 trillion. In the U.S., the housing market has stalled, and our banking system will face waves of bad loans in several categories: mortgage lending, commercial real estate, construction and development loans, student loans, car loans, and credit card debt. Our bigger banks have relationships with banks in developing and emerging markets.

Household debt totals $44 trillion. Main Street U.S.A. and small businesses are being squeezed by the money center and regional banks that have tightened their lending standards beyond the 0.25% bump for each rate hike by the FOMC.

The daily chart for Goldman Sachs

Goldman has been below a "death cross" since May 29, when the 50-day simple moving average fell below the 200-day simple moving average to indicate that lower prices would follow. Since this bearish signal, the stock traded as high as $245.08, failing just below its 200-day simple moving average, then at $245.53. The stock traded as low as $198.44 on Nov. 14, giving traders the opportunity to buy the stock at my monthly value level of $200.82.

The weekly chart for Goldman Sachs

The weekly chart for Goldman Sachs is neutral, with the stock below its five-week modified moving average of $220.00 and moving below its 200-week simple moving average at $208.17 this week. The stock thus returned to its "reversion to the mean." The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 32.79, up slightly from 32.05 on Nov. 9.        

Given these charts and analysis, I recommend buying Goldman Sachs shares on weakness to my monthly value level at $200.82 and reducing holdings on strength to my annual pivot at $205.27. This is a tight trade, so it is advisable to use only 25% of your cash usually deployed in a short-term trade.

The daily chart for Morgan Stanley

The daily chart shows that Morgan Stanley has been below a "death cross" since June 26. A "death cross" occurs when the 50-day simple moving average falls below the 200-day simple moving average, indicating that lower prices lie ahead. The stock is below my semiannual pivot of $49.77, which is the horizontal line shown on the chart. Note how this pivot was a magnet between July 20 and Sept. 21 as a level at which to reduce holdings.

The weekly chart for Morgan Stanley

The weekly chart for Morgan Stanley is neutral, with the stock below its five-week modified moving average of $45.59. The stock is above its 200-week simple moving average at $40.45, which is the "reversion to the mean," last tested during the week of Aug. 19, 2016, when the average was $29.92. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 27.21, up slightly from 27.14 on Nov. 9.

Given these charts and analysis, investors should buy Morgan Stanley shares on weakness my monthly and annual value levels of $41.85 and $39.43, respectively, and reduce holding on strength to my semiannual pivot of $49.77.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.