Sterling Weekly for November 7th, 2005

The overall market has continued to move higher since the October 31st edition of the Sterling Weekly in which I discussed an apparent "triangle pattern" forming on the Dow Jones Industrial Average. Since then the Dow has rallied to the upper end of that expected trading range. (see chart below) Now is when we will all get a chance to see how accurate I am. If this pattern is going to hold then what I expect will happen is that the Dow will see 1 or 2 more days of upside movement before a pullback starts that will take it back lower towards the 10,200 level. Or if this pattern was just a figment of my imagination then the Dow will continue higher towards the 10,700 level.

This week I wanted to take a look at the Amex Securities Broker/Dealer Index 'XBD'. Even though the overall market has been rallying recently, the 'XBD' has been the only sector index to have set a new yearly high (actually a new all-time high) within the last week. The index is designed to measure the performance of large companies in the US securities industry. There are 12 individual companies which comprise the 'XBD'. They are Raymond James 'RJF', Schwab 'SCH', Goldman Sachs 'GS', Lehman Bros. 'LEH', Jefferies Group 'JEF', Ameritrade 'AMTD' , Merrill Lynch 'MER' Legg Mason 'LM', Bear Stearns 'BSC', E*Trade 'ET', AG Edwards 'AGE', and Morgan Stanley 'MWD.' A couple of very basic principals to consider; 1) a trend remains in place until it is broken, and 2) indices are comprised of component issues and they move their respective indices not the other way around. Therefore if you are buying one of the best performing companies within a top performing index, the your chances of having a profitable trade are pretty darn good. And that is exactly what I did with the October 20th edition of the Prime Stock Newsletter when I recommended Merrill Lynch 'MER' at $62.45/share; and yesterday the shares of 'MER' closed at $65.80/share, up $3.35 or 5.3% in 13 trading days. Not too bad!

So here is the big question, where do I think the 'XBD' will go to over the short term?? Well I looked at a longer term chart and it appears that the 'XBD' will make a move over the intermediate term to approximately the 212 level. With the 'XBD' having recently closed at 186.57 that is a move of approximately 25 or an additional 13% of upside movement.