Friday, April 27, 2007

Fortune Telling with Broker Dealers..

This is the basic chart showing the NYSE Composite Index with the advance/decline moving average and money flow indicators. Both indicators show that the market is looking like it is in an overbought area and needs to consolidate. This doesn't necessarily mean it is going to reverse and sell off, it just means some time is needed to digest the gains of late.

One group to always keep an eye on is the Broker Dealer Index(XBD). Below is a weekly chart comparing the Broker Dealer Index to the S&P500. In the lower part of the chart is spread between the two indexes. When the red line is sloping upwards, the brokers are outperforming the market. One part of the spread is market with a blue line to compare the performance between the two. From the time of June 2005 until April of 2006, the XBD had a return of an 81% gain versus a 14% for the S&P 500. It pays to be in the right group, it can be the difference between a good year and a great year. This method of looking at spreads can be used with any group or stock against an index. Setting up a program that alerts when a slope starts to change from negative to positive can be a very valuable tool.

Looking at the current data in this spread between the XBD and the S&P500, it shows that as the market has recovered nicely from the February China event, the brokers as a group have not recovered the ground they lost. This could be a warning sign and something to keep an eye on. It also is setting up a couple possible pairs trades between different sets of stocks in the broker dealer index. In an earlier post a couple pairs trades were mentioned. The trade between Arch Coal and Massey Energy is a great example and one which presented itself again a couple weeks ago. Below are some broker dealer charts showing the February levels along with volumes.

Goldman Sachs has recovered the full move down, but volume isn't great since doing so. That all could change with a good GDP number, but looking for pull backs seems safer than playing the breakout game right now.

Bear Stearns has not recovered well at all, exposure to the mortgage trading market could be the reason. The chart says there is something that is wrong. This could be the short trade if this markets rally starts to lose steam.

Lehman Brothers is similar to BSC.

Merrill Lynch has recovered a little bit better, but not as strong as Goldman Sachs and Morgan Stanley. Below is the Morgan Stanley chart.

A couple groups of these brokers could be matched up to create some pair trades that could work pretty well. This could also be done with options to limit the cost.

Below is a good looking chart and says a lot about what sector the focus should be in. Safety stocks that can weather a slowing economy;General Mills.

No comments: