Are Morgan Stanley, Goldman Sachs Leading the Banks Lower?

While there is quite a bit of widespread profit-taking in the financials, as stocks like Bank of America (NYSE: BAC) and JP Morgan Chase (NYSE: JPM) pull back to the lower end of recent, short-term trading ranges, some of the most aggressive selling is taking place in Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS).

Both Morgan Stanley and Goldman Sachs are in multiple-day drawdowns. Shares of Morgan Stanley have closed lower for five out of the last six trading days, including a pullback of more than 2% on Tuesday alone. The correction, especially over the last four sessions, has kept the stock trading at levels just outside of the technically oversold, and earned MS a one-point ratings upgrade to 7 out of 10, just one point below our “consider buying” category.

Goldman shares reversed back to the downside by more than one and a half percent in Tuesday’s session. Finishing lower for the third day out of the past six, Goldman also earned a one-point ratings upgrade from a 6 out of 10 to 7 out of 10.

The current pullback in GS has taken the stock to new, two-week lows for the second time since the stock climbed back into bull market territory in mid-February. Then, a three-day sell-off in early May lead to a rally of more than nine and a half percent over the next five days.

Shares of Morgan Stanley have earned a short-term, positive edge of one and a quarter percent ahead of trading on Wednesday. Goldman Sachs has a positive edge of just over half a percent in the short-term.

Growing weakness in major financials like Goldman and Morgan Stanley has yet to produce oversold conditions in the most widely-traded, financial exchange-traded funds like the Financial Select Sector SPDRS ETF (NYSE: XLF) and the iShares Dow Jones US Financial Sector Index Fund ETF (NYSE: IYF). That said, both ETFs are trading in neutral territory with a slight bias to the oversold, and could easily trade oversold by the second half of the week on any significant selling over the next few days.

The one financial fund that is trading in oversold territory ahead of Wednesday’s open is the Market Vectors Bank and Brokerage ETF (NYSE: RKH). RKH has finished oversold for three out of the past four trading days.

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David Penn is Editor in Chief of