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Index Wrap

Brokers are center stage

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Mixed sector action and fractional gains were today's story, where despite some mixed earnings guidance from company's like PeopleSoft (NASDAQ:PSFT) $17.13 +1.84%, which warned on upcoming quarterly earnings, saying Oracle's unwanted advances negatively impacted results, the major indices finished flat.

Oh, but there could be some trouble brewing at the 120 level, where the Securities Broker Dealer Index (XBD.X) 120.19 -2.03% threaten to give a triple-bottom sell signal on its point and figure chart, where in the context of financials, and their impact on market psychology, if not price action (INDU/SPX/OEX), this group was spotlighted in our June 21 Index Trader Wrap, and moves to center stage.

I'm not looking to point out every negative, or every positive, but the XBD.X looks as if it might have one more leg lower.

If so, I don't see that being a near-term bullish sign.

Some points of order.

Once again, fellow analyst Jonathan Levinson made a point in this afternoon's Market Monitor that program trading at the NYSE was 70% of last week's volume.

Heck, just last week a trader named Joe sent me an e-mail noting that 70.5% of shares traded on the NYSE the week prior, with 61.6% of the volume being accounted for by 5 of the top program trading firms!

Joe made a lot of points in his e-mail, which I really haven't had the time to review, but program trading is certainly a high percentage of daily trade volumes, and may be one reason the major indices have gone nowhere fast in recent months.

Where are these higher PERCENTAGE figures coming from? Are computer and institutions taking over?

In a way they are, but put it in context of the lighter volumes we've been seeing this summer, as traders like you and I struggle through the summer doldrums.

Laughing.... this weekend I went to the barber to get my hair cut. I sat in the chair.... pump, pump, pump the chair lifted to bring my head up to proper haircutting level. When the barber was done... speeeeeeewwwwwww.... the air was let out of the hydrolics as the chair came right back down where it started from.

Trying to trade the indices that past couple of months has been somewhat similar to getting your hair cut you might say.

I didn't go through the roof, I didn't fall through the floor.

As Joe said in his e-mail.... "Except for me, anyone else doing any trading?? There couldn't be too many of us. The above numbers are just for program trades - 15 stocks over $1 million value. Just think about all the non-program trades that these guys executed."

Well Joe, I've been thinking about it, and that's why I've taken another, and more detailed look at the XBD.X tonight. We're going to also dig into DorseyWright and Associates' "Wall Street" sector bullish %, and then bring it back full circle to the S&P 500 Bullish % ($BPSPX) from Stockcharts.com.

Don't YOU think a broker would have a pretty good idea of what his TRADE VOLUME was from the retail customer (you and I)? Certainly some of the bigger brokers derive revenue/income from areas other than brokering trades for you and I.

I tell you what Joe. With Ameritrade (NASDAQ:AMTD) $10.11 -4.71% trading a 10-month low today (a component of the XBD.X), I begin to sense that its price action, along with high percentage dominance of program trading, that Joe might well be a highly coveted consumer by some of the online brokers, where at least Joe is doing some trading!

U.S. Market Watch - Daily Intervals

Some highlights I've made in this evening's U.S. Market Watch.

I'm showing the 5-day percentage gain/loss column. Time flies, but it has been 5 trading sessions since the FOMC raised its target for Fed Funds to 1.25% from 1.0%.

While not truly reflective of Treasury prices, or decline in yield, Treasury yields have dropped (buying of this interest rate sensitive security), which would go against all common sense. However, as I began discussing months ago, the RATE that yields rose by a strong bout of selling from March to mid-May most likely was "overdone" on thought of the Fed being more AGGRESSIVE with rate hikes. Recent economic data has cooled as a result of higher Treasury yields, which can impact consumer spending habits.

As RAPID INFLATION concerns have abated, combined with some cooling off of economic indicators, the dollar has declines with the U.S Dollar Index (dx00y) 87.67 down 1.93%. Remember, we thought the dollars rise might have been foreigners (is that politically correct?) buying dollars in front of Fed tightening. When the Fed raised just 25 basis points, the momentum trade ended quickly.

Certainly the CRB Index (cr00y) 272.55 +1.96% in 5 sessions may be showing some of the "reflation" that can follow lower Treasury yields, where consumer's cost of borrowing eases.

We saw some of this in today's Mortgage Bankers Association data. See 11:00 AM EDT intra-day update.

The S&P Banks Index (BIX.X) 347.83 +0.56%, which was the first equity-based index in our WEEKLY Pivot Matrix to see a trade at its WEEKLY Pivot (to the upside) shows some relative strength the past 5 sessions with a modest 0.41% gain. Many regional banks will derive revenue from mortgage loan originations, or refinancing activity.

As the major equity indices continue to gyrate, gold stocks as well as gold and base metals also begin to "reflate" as Treasury yields have fallen.

Securities Broker/Dealer Index (XBD.X) - Weekly Intervals

In the June 21 Index Wrap, we looked at the XBD.X bar chart on a daily interval chart, where today's close would have the XBD.X below our upward "cheater's trend" and unlike the other major indices, the XBD continues to find sellers more formidable than buyers at the downward trend, which so happens to coincide with the 50-day SMA.

Note: Since breaking BELOW its 50-day SMA on March 10, 2004, its managed to CLOSE above this intermediate-term trend twice, and just fractionally so (04/01 and 04/02).

I've overlaid some various bullish percent readings from Dorsey/Wright and Associates "Wall Street" bullish %, so we get the feel of RISK levels and strength/weakness during a cycle.

A simple observation based on conventional retracement overlaid was how "easy" it was to buy the XBD.X above 82.50, then sell it on the break below 133.50.

Let's take a quick look at Dorsey/Wright's "Wall Street" bullish % (BPWALL), where they group together a bunch of brokerage- related stocks on a point and figure chart. Remember, to build a bullish %, all you're doing is making two stacks of charts. One stack contains charts where the PnF chart shows a BUY signal intact on the chart, while the other stack of charts are those that show a SELL signal intact on the chart. Just imagine that the following chart is a percentage of those stocks that currently have a BUY signal associated with there chart. For the sake of simplicity, lets imagine there are 100 charts, and roughly 43, or 43% of those charts currently show a buy signal still intact with the chart. In March of this year, 90% of the stocks were on a buy signal and everything was REAL bullish. Too bullish.

Bullish % for Wall Street (BPWALL) - 2% box scale

I don't want to go through every little detail in the above chart, but look at the broader "pattern" as this is where I will bring in THIS sector, as it relates to the S&P 500 Index (SPX.X) and S&P 100 Index (OEX.X), as well as their bullish % charts.

If I were to analyze this chart, as well as the prior weekly bar chart of the XBD.X, I would say that XBD.X 117 is an IMPORTANT level of near-term support (120 is a heads up to further technical weakness and supply O outstripping demand X). Now associate a BREAK at XBD.X 117, an implications if Dorsey's "Wall Street" bullish % (BPWALL) reverses back lower. It would currently take a BPWALL reversal lower to 36%, for this sector bullish % to reverse back lower to "bear confirmed."

What I'm trying to do tonight is I'm really trying to find A SECTOR that could give us a FINITE clue for strength/weakness to the major indices.

Now... the INTERNALS as depicted by the BPWALL have shown some internal improvement (some buy signals were generated of late, where the bullish % reversed up), but the OUTWARD appearance of the XBD.X, doesn't have the "patient" looking too healthy.

The REASON I would not be a gung-ho short with an XBD.X trade at 120, is that a trade at 120.00 (Hmmmm.... why didn't it trade 120.00 today?) could be a "bear trap" on the point and figure chart of the $XBD.X (you can get a free chart of the XBD.X at www.stockcharts.com) where a "bear trap" on a point and figure chart is a triple bottom sell signal that goes 1 box below, then QUICKLY reverses back higher. With the BPWALL rising just a little bit, and showing some sign of improving strength (not a lot, but some) a bear looks around, and understands where he/she has been, and where they are at with the bullish %.

So.. when you look at both the S&P 500 Bullish % ($BPSPX) and S&P 100 Bullish % ($BPOEX) at www.stockcharts.com, or read each morning's 09:00 AM EDT update at the bottom, you should really be able to begin to understand my focus on the Brokerage Index and the Wall Street Bullish % ($BPWALL), as this would be a sector to at least be monitoring ONCE AGAIN for pending weakness, which could lead to further weakness for the SPX/OEX, and INDU, which also has some broker exposure.

I'm running late, but I really wanted to try and bring in a sector bullish % and the brokers tonight, as they aren't looking overly bullish at the close.

Let's quickly run through today's internals, but also visualize the NH/NL indications, also in the context of the bullish %, and how the shorter-term (5-day NH/NL ratios) are starting to weaken again.

Market Snapshot / Internals - 07/07/04 Close

The NASDAQ Composite (COMPX) 1,966.08 +0.13% managed to hold onto a 2.6 point gain by the close, but it must have been a struggle for bulls where by the close decliners edged out advancers by a narrow 8 to 7 margin. Despite the fractional gains for this very broad market average, we're starting to see a deceleration, if not anti-lock-braking in shorter-term bullish leadership, where the NASDAQ's 5-day NH/NL ratio falls 8.5% today as the number of new lows outnumbers new high. This shorter-term 5-day average observation begins to pull on the 10-day ratio, where it would currently take a 10-day percentage reading of 62.00% for the NASDAQ's 10-day NH/NL ratio to reverse back lower to "bear confirmed" status.

The percentage gain for the also very broad NYSE Composite ($NYA.X) 6,518.71 +0.33% was best among the major averages, where there was at least some sign of internals strength holding in today's session. A few number of new highs, but a growing number of new lows really gives the look of an inchworm, where the head and the tail are coming together, and the thorax, or midsection gets compressed. Shorter-term bullish leadership depicted by the 5-day ratio fell 3%, while NYSE 10-day NH/NL ratio slipped 1.6% after today's session. It would currently take a reading of 76.00% for the NYSE 10-day NH/NL to reverse lower to "bear confirmed" on its chart.

As we get a "feel" for the abatement in bullish leadership in the NH/NL indicators, begin to think, or realize what impact the brokers may have on things as the teeter at some very important near-term support levels.

Pivot Analysis Matrix -

As I went through the intra-day charts to mark the session's highs and lows, I found little conviction among bulls or bears. The dip at the morning, when little follow through was found, seemed to be snapped up, as if bears said... OK, in a range-bound trade, I'm taking what I can get. The BIX.X really looked like it was going to lead strength to the close, but with just more than an hour left in today's trade, the BIX.X faded from its session high to the close, as did the other major indices.

In after-hours trade, the QQQ last ticked by at $35.67, where earnings from Yahoo! Inc (NASDAQ:YHOO) $32.60 -1.85% and forward guidance had the stock falling to $28.75.

This will most likely have the QQQ facing early resistance tomorrow morning at DAILY S1 and WEEKLY S2.

My thought on closing is if we're going to find any strength tomorrow, then it would be the financials, where the BIX.X did at least get trade at WEEKLY Pivot.

The brokers may well be the "swing sector" as both the SPX/OEX closed rather "neutral" at DAILY Pivots, but weaker at MONTHLY S1s.

Jeff Bailey

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