Despite being the last week of 2021, market will be open for regular trading for all 5 days of this week. However, trading volumes are understandably light as many participants are enjoying the holidays. Take Ford (F) for example, yesterday traded 50 million shares, compared to the average 100 million shares traded in early December. Generally, moves that occur with relatively light volumes are not to be trusted too much: when a move up does not occur with heavy volume, our intention is to sell, and the buying intention is true for moves down with low volumes. For the past 2 weeks with volumes expectedly to be lowest in the year, the S&P500 have moved up considerably. Although it is consistent with our prior forecast of a Santa rally, we do not like this move and will look to fade it, again because it is occurring with low volumes. Additionally, we do not believe that recent move up is merited on any strong, substantial change in the fundamental picture. As a result, we want to look for opportunities to trim shares, preserve cash for buying opportunities lower from here.

Despite our strong fundamental conviction for Morgan Stanley (MS), we found that we will need to trim this name. Earlier this morning, we sold shares of MS at an average price of 99.54$/share, decreasing the weight of this position from 8.6% to now 6.5%. Although this selling is around our average cost basis for this position so there's not a substantial gain, remember that we bought MS much lower earlier in the past two months on Omicron-related sell-offs. Particularly, we bought shares in the lower 90s here and here, and our selling here would represent a roughly 5% gain on those purchases. The reason for selling now? Strongly a technical-based move.

Fundamental view: shares of MS, together with the entire financial sector, have not been performing well or cannot breakout because of the spread between the short-and-long term yields. Particularly, traders are pairing the financials to the spread between the 2-year to 10-year treasury yields. Banks do well when the spread between the 2-year and the 10-year increases, because it means they can borrow short-term money very cheaply and then loan that money out long-term at a higher rate, thereby increasing profit margins. Currently, the spread is at 0.75% and on the decline, compared to the highest level of 2021 at about 1.6%. This is calculated by subtracting the current 2-year yield of 0.76% (which has been on a sharp rise) from the current 10-year yield of 1.55% (which has been moving sideways). 

Bottom Line: On the fundamental side, we believe banks will only breakout when the 10-year treasury yield breaks out and go higher. We currently see banks trading in a side-way action. Together with the fact that we want to be selling something (as laid out at the beginning of this post), we are trimming shares of Morgan Stanley. We will look to buy back the shares that we've trimmed at lower prices. On the other hand, if a clear break-out occurs immediately tomorrow, we would be willing to buy higher, granted all evidence is appealing.