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Market holding high ground as brokerage stocks roll

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Today's session has had some volatility within the various sectors, but the broader market averages are back in the green. It seems like each session is has its "winners" and this is a sign of a bullish market environment. Yesterday the semiconductors shined, today its the brokerage stocks.

Securities Broker/Dealer Index Chart - Daily Interval

Yesterday's break of long-term downward trend in the XBD.X gave bears little to hold onto. What the heck is a bear to do when his/her last downward trend is broken to the upside? Most likely cover as risk soon became retracement at $566. The bullish action in these stocks and other financials will help the S&P 500 Index as that index is comprised of about 18% financials.

KBW Bank Sector Index (BKX.X) - Daily Interval

Banking stocks have two edges, just like a sword. One edge is that a lower interest rate environment with an Fed cutting rates is supposed to be good for the group. The problem with that adage is that in a troubled economic environment, loan defaults can run high. Remember, the Fed started cutting rates in early January of 2001. The trend found in the BKX.X tells us that a Fed cutting rates isn't always good for banks. Now we're seeing a move higher and test of this trend. If we get a move above like we saw in the XBD.X, I have to think that the MARKET likes the group because it feels loan defaults are going to be subsiding. Why would loan defaults subside? A strengthening economy. Now we've got a scenario and a technical test to be monitoring here. Just like we're doing with the Dow Transportation Average (TRAN).

Jeff Bailey
Senior Market Technician
Option Investor

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