The financial sector has been under pressure of late, with the exception of insurance stocks.
Regional banks, nontraditional lending institutions and even some larger banks have been under pressure and losing their leadership status.
This is no real surprise, as most of the sectors that we just mentioned have one problem in common -- the housing industry.
Most of their growth has come from the mortgage business, second mortgages and refinances. With the housing market slowing, this has had a negative impact on these companies and their stock prices.
The problem has expanded far enough to begin engulfing the brokerage companies in the subprime quagmire.
No financial boom is without its creation of new products and the use of derivatives.
Brokerage firms have been heavily involved in the creation and marketing of collateralized debt obligations backed by subprime loans.
This has raised concerns about the brokerage stocks, in general, and their risk from these products beyond what has been publicized.
The group has also been trading weaker as concerns over a potential unraveling of the CDO market creep into the sector.
The brokerage stocks often act as leading indicators of broader market health due to the sector's sensitivity to any market weakness.
The recent lack of upside momentum in the market is weighing heavily on the stocks.
The market slowdown and the bearish fundamental catalyst coming from the CDO and subprime market is creating a situation where the brokerage stocks are now vulnerable to downside action and may move into a corrective phase across the board.
The brokerage stocks are displaying deteriorating technical configurations.
is the weakest of the major brokerage stocks and the one most vulnerable to further downside pressure. The stock has broken the multiyear uptrend, a significant negative change and one that suggests the stock is no longer on the offensive.
Use strength back to the $150 level as an opportunity to sell. A break of the $135 level would suggest further weakness to the mid $120s, which is long-term support. A break of that level would be a significant negative long-term change for the worse. We would be looking to protect gains in this issue, with aggressive traders looking to this issue as a potential short sale.
is not quite as negative as Bear Stearns, but is also showing signs of deterioration. The stock has rolled over and looks heavy. We would be concerned about further downside risk and suggest watching the $78 to $80 level very closely. A break of that level would put this issue on the defensive and suggest further weakness to the $72 level, which is the weekly uptrend line. The increased volume in the recent selling is also concerning and is a sign of increased distributive pressure.
Look for Merrill Lynch and Bear Sterns to underperform the broader market on a relative basis in the coming weeks. Cut back long exposure in the brokerage group and wait for the subprime mess to play out. Look for the group to reach a long-term oversold reading before moving back toward the sector.
At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.