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Things are looking up for “stock market” stocks! That should be good news for bulls.
Why?
Well, historically, when Wall Street firms are showing rising profits and their stocks are heading higher, it obviously means business is good. Put simply, stocks and the variety of services linked to them are in demand. This also means people are expecting a good economy. The stock market is always looking about six months ahead.
The stock market pulled out of its bear funk back in March of 2003 and scored strong gains that year. The Dow rose from a low around 7,416 to a peak of 10,527 in 2003. It was the first year of a bull market, which is traditionally very strong.
The next two years, 2004 and 2005, the stock market as measured by the major averages just “danced in place.” The Dow industrials meandered in a trading range bracketed between 9,700 on the downside and 11,000 on the upside. As of mid-January 2006, it is at 10,975.
Of course, the question is: What will the stock market do in 2006?
A positive hint in January was flashed by the strong action of the “Wall Street stocks.” In mid-January, several brokerage, investment management and investment banking stocks broke out of well-formed technical basing patterns and hit new 52-week highs.
The key days were January 9 through 11. Using eSignal’s Power Scan service, one could have spotted Merrill Lynch (MER), the largest retail brokerage firm in the U.S., breaking out to a new high from an eight-week flat base.
The move came on an expansion in volume and drove the stock through the top of its base at 69.40. The next few sessions MER followed through getting to 71. Since the start of the bull market in 2003, MER has climbed from 33, a gain of 115 percent.
Three other major brokerage firm stocks broke out around the same time. They were Bear Stearns Cos. (BSC), AG Edwards Inc. (AGE) and Jefferies Group Inc. (JEF). All of those stocks are near 52-week highs.
However, the big winners in the brokerage group so far are some of the “little guys.” Ameritrade Holding Inc. (AMTD), a major user of online trading, hit a new high in mid-January getting to 25.70. Since the bull market started in 2003, the stock has skyrocketed from 5, a gain of 414 percent.
E Trade Financial Corp. (ET) ran to a new high of 22.30. I recall seeing heavy insider buying in the stock back in April of last year when it was 11. The insiders were right on target because the stock has doubled since then. From the bear market low when it was 4, ET is up 447 percent.
Investment banking stocks are doing well. Lehman Brothers Holdings Inc. (LEH) broke out of an eight-week base in mid-January to hit a 52-week high. It has climbed from 50 at the start of the bull market to 135.83.
Also, Lazard Ltd. (LAZ), which went public in May of 2005 and traded around 21 at that time, has climbed to 35. This is a new high. In the money management area, Legg Mason Inc. (LM) has soared from 30 in March of 2003 to 129 to pace that sector.
Are the “stock market” stocks overdone? Have they topped? The answer would have to be no. “The trend is your friend” as the old saying goes and most “stock market” stocks remain in technical price up trends.
In addition, eSignal subscribers should be on the alert for any initial public offerings (IPOs) in the investment sector. Those stocks could do very well in the months ahead.
Morningstar Inc. (MORN), the Chicago-based investment advisory service, came public at 20 in May of last year. The stock is now at 40 and trending higher. It posted a 100 percent jump in earnings for the first nine months of 2005 to 48 cents a share from 24 cents a year ago. A key contributor to earnings was the Morningstar Advisor Workstation product.
Also, GFI Group Inc. (GFIG), an inter-dealer broker specializing in over-the-counter derivative products, came public at 25 back in February of 2005. The stock is now pushing 50.
And, yes, the stock of eSignal’s parent firm, Interactive Data Corp. (IDC), which trades on the NYSE, has performed well, rising from 13.50 back in early 2003 to 22.30. The firm also produces CMS BondEdge and FT Interactive Data for institutions.
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