Broker-dealers might be the kissing cousins of the banking stocks but the sector has traveled a far different path in the last decade. For starters, the group was on fire in the last bull market while banks just crept higher at a snail's pace. Of course, we now know the run-up was driven by exotic instruments that nearly brought down the world economy.
The industry has changed dramatically in the last two years with the demise of
. In addition, the near monopoly of
, at least in the realm of investment banking, is certain to influence the broker-dealer group for many years to come. So what can we expect going forward with this reconstituted market group?
Amex Securities Broker Dealer Index
(XBD.X) shows a seven-year parabolic rise and fall, not unlike the crude oil market between 2006 and 2009. This year's low near 60, right at the 100% retracement of the 2001 to 2003 basing pattern, looks legitimate and sustainable. In other words, the long decline in the broker-dealer sector is now over.
Historically, broken parabolas trigger a set of assumptions that I've rarely seen violated in the last 20 years. At the top of the list: broken bubbles never get reinflated, whether it's Hunt Brothers silver, 17th century tulips or 21st century tech stocks. Therefore it's unlikely the index will return to the 2007 high at 268 at any point in our lifetimes.
That might be an extreme statement but it's on par with other historic bubbles -- does anyone expect the
to make a return trip to the 2000 high at 5132? However, the index can still move higher for a few years and make informed shareholders like Warren Buffett very content with their sector returns.
Fibonacci offers excellent guidance on long-term charts, where many points can pass between big support and resistance levels. The 38% and 50% retracements on the broker-dealer index, which roughly correspond with the 20 points between 140 and 160, stand out like a sore thumb. Note how volatile swings in the fourth quarter of 2008 criss-cross this zone repeatedly.
These levels also correspond with a 2004-2005 breakout pattern that triggered the nearly vertical rally to 240. With the index now pushing toward 120, there's just 20 points of upside before it runs into this brick wall of resistance. That's no big deal for market-timers holding six- to nine-month positions, but investors need to think twice about portfolio positions they intend to hold for one to three years.
There's a legitimate argument about whether or not this index even "works" because it's weighting has shifted radically since the demise of Goldman's biggest competitors. My counter-argument is simple: The
Dow Industrial Average
changes its components annually, with the 2009 version radically different than the 1999 version. It's really no different with this index or any index for that matter.
Logic dictates that as Goldman Sachs goes, so goes the broker-dealer index. The weekly chart of this industry giant shows a long selloff between 250 and 48, followed by a powerful bounce into 160, where price has been moving sideways for the last six weeks. Contrast this price action with the
, which has posted a series of rally highs over the same time frame.
The culprit for this unusual period of underperformance lies in major resistance at 170, hit a few weeks ago. At that time, the stock ran into the starting point of the September selloff that broke major support between 160 and 175. In addition, this level marks the 62% retracement of the entire selloff.
It's premature to call for a big pullback but we do need to be cognizant about the heightened risk. Truth be told, the divergence from S&P 500 performance bothers me more than the mixed technicals right now. In a nutshell, this is a leadership stock that needs to go higher for the broad market to go higher. So far, there's no evidence that's about to happen.
, Goldman's only legitimate threat to supremacy? Sadly, watching price action on this chart in the last three months has been like watching paint dry. The stock bottomed out in October, ahead of the broad market, and started to recover. It rallied above the 200-day moving average in May, but shows little progress since that time.
It might be carving out a cup-and-handle breakout pattern with resistance near 32, but volume shows a surprising degree of apathy and its bad news the issue hasn't risen more forcefully with the broad market. So while there's still time for a long overdue rally, the clock is ticking and ticking and ticking
Why is this stock fumbling around in a strong market environment? Like Goldman, it's lifted into the realm of last year's historic market crash. Looking back you can see where it plunged through a major support zone between 30 and 35, printing massive volume that's now keeping a firm lid on the recovery effort.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of
, a premium product that outlines his charts and analysis. Farley has also been featured in
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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