Fear the Trainwreck in Brokerage Stocks (GS, MS, CME)

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It’s official. As the body bags pile up from the latest bear attack on blue chips — marking the sixth consecutive day of losses in the major indices — there shouldn’t be any doubt by now that the markets are in serious trouble.

Consider these sobering facts: In the three days spanning from August 20 of this year, the Dow Jones Industrial Average shed more than 1,477 points — the worst such statistic in the Dow’s history. In total, the loss of market capitalization in the recent correction amounted to nearly $2 trillion, or roughly 11% of the gross domestic product of the U.S. in 2014.

Such macabre figures have led financial experts to focus on energy and technology companies — names that are most susceptible to the volatility in commodities and the Chinese economy, respectively. However, brokerage stocks have taken a silent beating, escaping much of the blood-curling headlines reserved for the most obvious sectors.

XLF, XLK, technical chart
Source: Source: JYE Financial, unless otherwise indicated

Over the past month, the financial services sector — which includes several major brokerage stocks — has lost more value in the markets than any other sector outside of energy. In fact, the Financial Select Sector SPDR Fund (XLF) is down nearly 9% year-to-date after trending positively for much of 2015. On the other hand, the much embattled Technology SPDR (XLK) is down nearly 7% YTD despite suffering extended bearishness since the end of May.

Don’t let their large wallets fool you! Brokerage stocks have more pain coming in the near-term before they can be considered discount buys.

Brokerage Stocks: Goldman Sachs (GS)

The undisputed stalwart among the brokerage stocks featured in this article, Goldman Sachs (GS) had some interesting words for its high-dollar clientele according to Business Insider, with the banking firm noting that “investors should anticipate higher volatility, especially in equity markets — and that investors should be prepared to exercise patience.”

Unfortunately for GS, stockholders weren’t especially patient.

After moving up 13% for the year in late June, GS stock quickly descended into a spiral, losing 8% of market value by Aug. 18. From there, GS stock would give up an additional 11% as bearishness ripped through global financial markets. All told, a bright outlook for 2015 quickly soured, with GS down a little more than 8% YTD.

It’s not so much about the red tape: GS stock has seen much worse volatility on a day-to-day basis, particularly in the 2008 crisis. Also, the average losses over the past four days of trading, while steep at -3%, are nowhere near a record.

GS stock, technical chart
Source: Source: JYE Financial, unless otherwise indicated

What is concerning, however, is how quickly GS stock broke under its long-term trend. On Aug. 21, when the closing price of GS first fell below its 200 day moving average, it did so sharply at a rate of -4%. Only two other times — in October of 2000 and February of 2001 — did GS stock fall so rapidly below its 200 DMA. In both cases, GS was still deep in the red a month later, with losses averaging -9.4%.

While it’s true that, historically, GS has always recovered from periods of massive volatility, such recoveries do take time. Statistically, investors are better off waiting at least a few more weeks before considering a position.

Brokerage Stocks: Morgan Stanley (MS)

Absorbing more than a 13% loss since the closing of the Aug. 19 session, Morgan Stanley (MS) is easily the worst-hit among the featured brokerage stocks. Although the bullish trend in MS stock continued until July 22 — about a month longer than GS — it would eventually be for naught. The resultant pressure from the global selloff put MS stock in the red for the year by as much as 18%.

Although Morgan Stanley shares didn’t fall nearly as rapidly as GS stock when it first breached its 200 DMA on Aug. 20 (-2.24% versus -4%), two major gap down sessions ensured that MS would be a critical laggard among brokerage stocks. Historically, whenever MS stock has fallen below 2% of its 200 DMA upon first breaching the long-term indicator, returns over the next 30 days average a dismal -2.8%.

MS stock, technical chart
Source: Source: JYE Financial, unless otherwise indicated

What is especially worrisome for MS shareholders is that, at a price below $32, the stock is trading in an area of little-to-no technical support. A year’s worth of bullish price action has essentially been undone in less than a week, presenting a grave risk of panic.

Similar to Goldman Sachs, Morgan Stanley has demonstrated resilience over the years. However, investors should be in no hurry to get a discount on MS stock as history suggests there are still more price cuts to come.

Brokerage Stocks: CME Group (CME)

Although CME Group Inc. (CME) is the smallest among the featured brokerage stocks by market cap, it was the least affected by the recent market correction. Against the close of the Aug. 19 session, CME stock surrendered “only” 8.4% of value, avoiding the ignominy of a double-digit loss. Surprisingly, CME is also up for the year by 2.3% — one of the few brokerage stocks to achieve a positive year-to-date figure.

However, that doesn’t mean that CME gets an automatic reprieve. Because of its dramatic fall from grace, shares are trading in a no-man’s land devoid of established technical support. Similar to the aforementioned Morgan Stanley, unless the bulls can engineer a quick recovery to firm up investor confidence, there is a heightened risk of panicked selling.

CME stock, technical chart
Source: Source: JYE Financial, unless otherwise indicated

In addition, the recent selloff coincides with CME reaching towards, but not quite touching its all-time adjusted high of $109.09, set on December 21, 2007. This creates a double-top formation in the long-term chart, which is a bearish pattern denoting an inability of current momentum to break past a ceiling of resistance.

Although CME is technically more stable than either GS or MS stock, brokerage stocks in general are badly strained. Common sense dictates that investors should wait out the storm before re-engaging this sector.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2015/08/brokerage-stocks-gs-ms-cme/.

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