Along with, or should I say, pulling the broader market along in recent weeks, the financials have been on a massive tear. Within the financials complex, the broker/dealers as measured by the AMEX Securities Broker/Dealer index (INDEX:XBD) displayed an even more impressive rally; a solid 33% off the November 2012 lows. Consolidation? What consolidation? Who needs to consolidate if you can just scream higher sans a seat-belt, right? Consolidation will come, and the steeper the slope, the quicker the correction on average.
After flipping through the broker/dealer stocks over the weekend, one stock in particular stood out to me: Charles Schwab Corp. (NYSE:SCHW). While many stocks in the group have vertical charts, few of them have had the recent seven day rally on top of the big jump since November.
To be fair, despite the steep slope on display, Charles Schwab rallied off the November 2012 lows in an orderly manner. The break past a three month down-trend (blue trend line) in early December led to higher prices, but each leg up followed sideways consolidation (blue bubbles) of one to two weeks. The latest rally off the mid-January consolidation has now also reached a critical point, one where sideways to down consolidation in price is highly likely. Each of the two consolidation periods on the chart came after a 12% and 14% rally respectively. From the late January consolidation the latest rally has now roughly reached 12%. Bearish candlesticks have thus far in 2013 been notably absent from the chart of SCHW; however, last Friday Feb. 1, a shooting star candle (albeit not a very strong one) appeared on the daily chart. Shooting star candles often lead to lower prices over coming days or weeks.
Another measure of how extended the stock price of SCHW currently is would be to look at how far it trades above its moving averages. Measured from the 200 day simple moving average, the stock is now roughly 26% extended. Consolidation or mean-reversion is not far away.
Just like XBD itself, Charles Schwab Corp. is not worth chasing higher at this point. Investors would be wise to take at least partial profits and aggressive traders could even consider an initial short-position in the near-term.