Clockwork Stock Charts

  • July 18, 2000
  • Loren Fleckenstein

Naming the leading companies in an
industry is a snap. Just run the numbers: earnings growth, sales growth, market
share, etc. Deciding when to buy or when to sell. That’s the
hard part. Timing is everything.

In the U.S. brokerage industry, the
two heavyweights are Merrill Lynch
(
MER |
Quote |
Chart |
News |
PowerRating) and Charles Schwab
(
SCH |
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News |
PowerRating). On
Tuesday, both reported strong Q2 profit gains despite the recent Nasdaq bear
market and rising interest rates.

Merrill Lynch reported earning $2.01 a
share in the second quarter vs. $1.57 a year ago and analyst estimates averaging
$1.70, according to First Call/Thomson Financial. The New York-based
full-service broker also said it would split its stock two for one. 

Schwab weighed in with operating net
of 14 cents a share vs. 12 cents a year ago and matching estimates. The San
Francisco-based company dominates its discount and online broker rivals. Schwab
is acquiring U.S. Trust, a move that will take the company into the full-service
segment of the industry.

Both stocks have made terrific runs,
but Schwab is basing nicely, forming the right side of a correction-recovery
pattern, while Merrill looks extended here.

 

For the optimum the intermediate-term
trade, Schwab should consolidate here. Let’s see contraction in price volatility
and trading volume. The former will give us a closer pivot point, so you don’t
have to chase the stock too far, as well as a better sense of where support
lies. The latter would suggest selling has dried up. The stock has traded above
its mid level for the past five sessions, a positive sign.

 

Merrill Lynch looks a tad bearish near
term. Notice how the last two moves into new high ground came on increasingly
feeble volume. (See the red arrows in the chart.)
If the stock is so attractive there, why aren’t the institutions buying? On
Tuesday, the stock fell on rising, above-average volume. In other words, Merrill
Lynch shares followed a thinly traded move to new highs with a distribution day.