The Chart du Jour
We were relatively quiet this week, not producing much content here at Sandspring.com. It wasn't that we weren't paying close attention - we were. It's just that we did not see any new definitive technical evidence either significantly bullish or bearish to comment on. Indeed, by Friday, the major averages were all shades of flat vis a vis last Friday, even with a great deal of trading noise in between.
One thing that did cause us a bit of angst this past week was when several of the financial sector stocks jumped higher. This was led first by Lehman Brothers on an earnings release, and then fueled by the Washington Post that wrote of Fed Governors' concern that recent rate cuts had not had much effect on the economy. Ergo, people came to believe that the Fed must cut rates more, and hence we saw the pavlonian reaction by many to buy the financials.
We're sorry, though, but we just don't think the last part of that equation will be an obvious outcome of further Fed rate cuts. Are brokerage stocks really that great of a business to be worth twice what they were in 1998 (see chart above)? Ask almost any person in Morgan Stanley's trading room and they will tell you that their underwriting business is poor, the competition from e-commerce websites (such as TradeWeb in bonds or Currenex in FX) is starting to impinge upon their traditional trading room dealing margins, and their in-house portfolio is chock full of stale deals left over from better days. They will also tell you without hesitation that their stock is a sale.
So it is that we remain bears for the summer. We envision June to end as a relatively small range month on the major indices, but with a low close. This month's low close will then likely slip into a more nasty problem to the downside all the way into mid-November.
On the Broker-dealer index chart above, we see 3537 as a very possible level to reach. The extrapolated Fibonacci bands pulled down from the Year 2000 XBD high fit well there, and this level would also represent an approximate 61.8% retracement of the 1998-2000 advance.
Although we have been harping on the financial sector for sometime now, it is also important to note that when we look at the chart of the Dow Jones Transporation Average below, we see definite weakness building in this pattern as well. Basis our Fibonacci extrapolation technique, 2111 looks like the target here. It's not a good time to be an airline looking for added summer travelers and business class fares.
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