M ORGAN STANLEY IS BIGGEST LOSER IN FALLING BROKERAGE GROUP -- WHY LOSS OF BROKER LEADERSHIP ISN'T GOOD FOR THE MARKET
MORGAN STANLEY IS LATEST CASUALTY ... On Friday I wrote about selling in brokerage stocks and showed chart breakdowns in Lehman Brothers and Merrill Lynch. The brokerage group was today's weakest industry, and the biggest percentage loser in the group was Morgan Stanley. The daily bars in Chart 1 show the stock falling below its 50-day moving average and trading at a new 2007 low. Equally ominous is the notable pickup in trading activity as the price fell. Chart 2 shows the Broker/Dealer Index (XBD) closing below its 50-day moving average for the first time in five months. The XBD:SPX ratio (top of chart) has broken a five-month up trendline. That carries a potentially negative warning for the rest of the market.
Chart 1
Chart 2
BROKERS HAVE BEEN BULL MARKET LEADERS ... Brokerage stocks are considered to be leading indicators for the rest of the market. It shouldn't come as a surprise then to see that they've led the market higher during the four year bull market. The red line is Chart 3 is the S&P 500 which started its bull run in the spring of 2003. The green line is a ratio of the brokerage index (XBD) divided by the S&P 500. The rising green line over the last four years confirms that brokerage stocks led the S&P 500 higher. To the upper right, however, you'll see that the green ratio line has failed to confirm the new high by the S&P 500, and is starting to weaken. That non-confirmation by a leading group is a potential danger sign. Chart 4 shows the XBD:SPX ratio by itself. The green circle marks the upside breakout in the ratio and the start of the bull market. The yellow circle shows that the ratio may be peaking. Loss of brokerage leadership isn't good for the market.
Chart 3
Chart 4
BROKERAGE TECHNICALS WEAKEN ... The weekly bars in Chart 5 show the Brokerage Index by itself with a couple of technical indicators overlaid on the price bars. Although the XBD recently hit a new record high, the 9-week RSI line (top of chart) failed to confirm the price high. The RSI is now threatening to fall below the 50 line for the first time since last May. A huge negative divergence is even more visible on the MACD lines. The weekly lines have fallen well short of their 2006 high, and have turned negative for the first time in nearly six months. [Bear in mind, however, that a weekly signal isn't official unless the lines are negative at Friday's close]. Even so, the technical picture for the brokerage stocks looks shaky. Potential loss of leadership from brokerage stocks (and financial stocks in general), combined with new inflationary signs from rising commodities (gold and oil in particular), inject a new note of caution into the market.
Chart 5
WATCH THE DOW SUPPORT LEVELS ... On Friday I showed that the point & figure uptrend for the Dow was intact. And it still is. I mentioned that the Dow would have to fall to 12500 to trigger the first p&f sell signal since last August. Chart 6 shows the Dow's daily bar chart. In order for the Dow to reach 12500, it would have to also violate its mid-February intra-day low at 12536 and its 50-day moving average (currently at 12545). Most of our short-term momentum indicators have started to weaken. But they haven't been that reliable during the six month rally. Instead of relying on them, I'd watch the market's support levels very closely. Any decisive violation of the February lows by the Dow, or any of the major stock indexes, would justify some profit-taking.
Chart 6
