Thursday, March 1, 2007

Canary In A Coal Mine?

Two days ago our markets took a hit after China's market had a 9% decline and some comments by Alan Greenspan hinted at the recession word. All of the "experts" have been on TV today saying its a buying opportunity for all kinds of various reasons. It might be a buying opportunity, but it might be the beginning of something no one wants a part of.

Two key groups to watch to get a gauge on where the market is going is the Broker Dealer Index and the Philadelphia Semiconductor Index. It is very hard for the market to go far on the upside without the brokerage stocks participating. In this example, the chart shows both the S&P 500 and the Broker Dealer Index. The bottom section of the chart shows the spread (XBD/SPX) between the Broker Dealer Index and the S&P500. The brokers tend to outperform the market at all times. When there is a rally, they are stronger, and when there is a sell off, they don't get hit has hard on a percentage basis. On the right side of the chart, the S&P500 is making recent highs, and the Broker Dealer Index has stalled. This shows that either the brokers were ahead of the market and taking a rest, or that this new rally in the over all market is a little suspect. This does not mean that we necessarily have a huge down move, but it could mean that things are going to consolidate, which could get people thinking more about risk. Is the glass half empty or worse?

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