The Market & The Brokers

Today we're stepping out of the ivory tower and wading back into the market moat. I was hoping that today's market action would be a follow-through on recent upward movement, but unless there's an end of day rally, it doesn't look like we're going to get it.

Last week the volatility index (VIX), a measure of market fear or risk, dropped below its 200dma and has remained there since. That's a good thing. For my taste, however, it needs to start moving below 20 and stay there before I'll be convinced that the worst is over. Also, the S&P (SPX) has been toying with its 1400 resistance level, and it will need to break that on heavy volume for me to be a true believer.

There are two high notes. One is that the Dow Transports (DTX), considered to be a leading indicator of market direction, did break through major resistance of 500 last week and has been in an upward trend since the middle of March. In fact, all of the major indices have been trending up since then, as I'm sure you know. The other bright spot is that the Q's (QQQQ), the Nasdaq 100 tracking stock, also broke its $46 resistance level. I think that if the market can hold through the next Fed meeting on interest rates scheduled for release this coming Wednesday, we may have the beginning of another bull market, albeit a tepid one considering that energy prices continue to rise, unemployment is rising, and the consumer is spending less. These are all factors that will figure into the equation so be careful about backing up your truck because you just might hit a brick wall.

Being wishy-washy is a way to cover one's butt and there's a lot of financial pundits out there who are doing just that, but this time I'm giving them a break since the financial crystal ball is very cloudy indeed. One ray of hope that the market may be turning up is to look at the current movement of the major brokerage firms. They've been rising stealthily for the past month, and if recent earnings news is any indication, their futures may indeed be bright.

Ever since the four-eyed credit-crunch ogre began to rear its ugly head early last summer, the brokers got whacked, declining 25-50% in value. Most of them put in a double bottom this January and rushed back up only to get beaten down again. Then came March 17th when JP Morgan shocked the investment community by offering a ridiculously low $2/share for Bear-Stearns. The news tanked all of the brokerage stocks, but since then they've been staging a rather nice comeback. Three of the major firms, Goldman-Sachs (GS), Morgan Stanley (MS), and Lehman Bros. (LEH), all just reported earnings that beat estimates. Only Merrill-Lynch (MER) reported earnings that were basically in-line. However, that didn't seem to hurt the stock much as it, too, has been on the rise.

So should you be a buyer of these brokerages? Except for Goldman, I would wait. All of these stocks are still trading below their 200dmas. I'll be more interested in them when they break overhead resistance on heavier than normal volume: MS at $55, LEH at $50, and MER at $50-$51. I think it was Guy Adami on CNBC's Fast Money who said about a month ago that Goldman is a screaming buy. (His words.) The company reported good earnings on March 18th and yesterday broke its all-important $180 resistance level. Today, it's flirting with its 200dma. You go, Guy! (I really wanted to say that.)

Knight Capital (NITE) is my other favorite. The firm surprised Wall Street last week with better than expected earnings, and recently broke its $18 resistance level. The stock is still climbing higher, trading up over a buck since Monday. [Note that most of the major brokerage stocks pay a low dividend except for Knight which pays none.]

What about the online brokers? Most of them have been rising in sync with the institutions, although their charts aren't quite as compelling. Perhaps this reflects the fact that they didn't beat earnings estimates as most reported in-line, except for Etrade (ETFC) which reported worse than expected earnings. Right now I'd stay away from this stock, at least until the company can trim the fat and turn around to profitability which analysts think may take at least two quarters. The star of the group is Interactive Brokers (IBKR) which blew out estimates today causing share prices to jump 10%. This is the best banana of the bunch. Both Schwab (SCHW) and TD Ameritrade (AMTD) are rising, but I can't really say if they're good buys at this level. Their performance will probably depend on the direction of the overall market.

If you're like many investors whose portfolios got whacked this year, maybe one way you can get back at your broker is to buy them. Yeah, that'll show 'em!