Thursday, February 23, 2006

Brokerage Stocks and the S&P: Another Leading Relationship

Here's another look at a market sector that has been exerting a lead relationship vis a vis the S&P 500 (SPY). It's the Broker-Dealer Index (XBD), which tracks the stocks of brokerage houses. One would think that if the XBD is healthy, that's a vote of confidence for the markets, and that should translate into favorable price action for SPY.

Over the past four days, we are essentially unchanged in SPY, but XBD is up by over 1%. I went back to March, 2003 (N = 744) and found 84 occasions in which SPY was neither up nor down more than .20% on a four-day basis. Over the next eight days, the average gain in SPY was .48% (52 up, 32 down). This compares with an average four-day gain in SPY of .50% (448 up, 296 down) for the sample overall. Clearly no great edge there.

When I divided the sample of little-changed SPY days in half, however, based on XBD performance, a pattern emerged. When XBD was strong, the next eight days in SPY averaged a very solid gain of .96% (31 up, 11 down). When XBD was weak, the next eight days in SPY averaged unchanged (21 up, 21 down). This suggests that bullish performance in XBD tends to anticipate bullish performance in SPY after we've had a narrow four days in the large caps. We'd have to count this as one for the bulls going forward.