Stocks Spring Forward, With Trepidation

The Amex Securities Broker/Dealer Index has fallen 5.4% from its Feb. 20 high, while the KBW Bank Index has slid 8.9%.

"There's billions of dollars of exposure spread all over the bulge bracket firms, minus the collateral backing the loans," says Art Hogan, chief market analyst at Jefferies & Co. "I just don't think this is a financial system-melting event."

Hogan notes that even if the brokerage earnings don't result in disaster, they won't necessarily lead to a rally either. In each of the past three quarters, Goldman usually beats expectations by far, thus setting the bar "too high" for the others, who inevitably disappoint.

Either way, investors might be well-served to stay away from the financial sector, writes John Roque, chief technical analyst at Natexis Bleichroeder. Citigroup's inability to follow through on a late-2006 rally combined with "weakening absolute and relative momentum" for the banking indices and "it is a good idea to stay defensive here," he writes, adding that the financials account for 21.8% of the S&P 500.

"Further weakness in financials will be a negative sign," he writes. Roque says investors should be watching breadth, or the net amount of advancing stocks on the NYSE, and the 10-day moving averages of new highs and lows for clues to the market's future. "New highs must rise and new lows must collapse for long-only investors to regain control," writes Roque. Until then, the correction isn't over, he writes.