December 18th, 2005

Morgan Stanley (MWD) and Sara Lee (SLE)

A new reader of this blog inquired about the stock of two highly esteemed companies, both of which have been mentioned on Jim Cramer’s Mad Money show: Morgan Stanley Dean Witter (MWD) was a bullish Cramer call last mentioned on 12/05 and Sara Lee (SLE) was also bullish and last mentioned on 12/15 . But what would a chartist like the Guru say about these stocks? What’s ironic is how similar the long-term charts for these two laggards in their respective industries actually appears.

Both stocks peaked over 5 years ago, both subsequently dropped 50% over the next 2 years and both have been building powerful, clearly defined bases since. If one takes a fundamentalist’s perspective, the stock performances would be attributed to failed growth strategies and internal performance failures. And if one is optimistic and believes that these companies will fix the problems, ultimately continue to survive and grow, then both charts support a positive longer term view.

Morgan Stanley: First, for a bigger picture context, the US Financial Services Sector (the IYG exchange traded fund) has been in a relatively narrow 15% upward sloping channel since turning the corner after the bursting of the Internet Bubble in 2003. Being currently at the upper boundary of that channel, the question is whether it will burst through or will that boundary serve as resistance causing the stocks in the sector to take a pause, perhaps even retreating. The group has be trending up coincidentally with rising short-term interest rates over the past 2 years; what will happen when the Fed stops raising those rates?

MWD is a laggard member of this group. As contrasted with the upward trend above, MWD has been forming a classic “pennant” pattern. If MWD is able to break through the upper resistance trend line, then higher prices over the short term is likely.

The longer term picture lends support to the view that MWD will break through the intermediate term upper resistance trend line and attempt to “catch up with the rest of the sector” by testing and breaking through the long term upper trend line that stretches back to 2001.

Success in penetrating that line points to MWD, over the long term may move to the 80-90 price range, and test it’s all time high reached in 2000-01.

Sara Lee: SLE was one of the stalwart of the last big bull market increasing from less than $2/share (on a split adjusted basis) to a high of nearly $32/share in April, 1998. As the chart below depicts, SLE has been struggling since and owners would have had to endure a 50% drop since:

Since 2000, SLE has been tracing a relatively wide channel where the prices have increased approximately 50% and fallen 33%. It has recently begun to move up from the lower channel boundary and, given a good wind behind it’s back from a favorable over-all market (remember, the market determines 50% of a stocks price movement), the stock could approach the upper boundary line again for a 35% move from this point. It’s too early to tell whether it might then successfully penetrate the upper boundary for an assault on the all-time high of 32.

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