Net Brokerage Stocks Show a Pattern

Online brokerage stocks surged for the fourth straight day Thursday, but investors looking to get in on the action now should be careful.

Shares of E-Trade Group, Ameritrade Holding, National Discount Brokers Group and other online firms began climbing Monday on the heels of a bullish report from influential analyst Bill Burnham. The Credit Suisse First Boston analyst said first-quarter revenue and earnings at many online brokerages probably will top earlier estimates because quarterly trading volume appears stronger than expected.

This week, shares of Ameritrade and National Discount Brokers have leaped 69%, while E-Trade has risen 53%.

So why shouldn’t a short-term trader jump aboard now in the hope the momentum will continue?

To answer that, take a look at the accompanying chart of E-Trade’s stock price since mid-December.

E-Trade shares have had three similar bursts in the recent past--in late December, in mid-January and again in late January/early February. But each move lasted only a few days and was followed by a short-term pullback.

To “technical” analysts, who follow the price and volume action of stocks, that’s a natural--and even healthy--pattern for a stock after such a rapid advance. The stock can’t sustain its supercharged pace and succumbs to profit-taking before flattening out into a “base.”

The risk that latecomers face, of course, is buying a stock at the tail end of a move and riding it down.

In late January, for example, a three-day run carried E-Trade shares to an intraday high of $66.44 from $41.78. Seven days later, it had sagged as low as $35.06.

Other online brokerage stocks have had similar patterns of quick bursts followed by consolidations.

To avoid buying stocks that have become “extended,” some traders prefer to instead latch onto other stocks in the same sector that have not yet risen as strongly.

That dynamic appeared to take place Thursday. Shares of Siebert Financial, the parent of online broker Muriel Siebert & Co., surged 28%, the biggest one-day jump since February.

The problem with that strategy, however, is that late-moving stocks often are considered by investors to be the least attractive in a sector. They can fall fast when a group pullback occurs.

* NEW BLITZ: E-Trade unveiling latest advertising campaign. C2

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E-Trade’s Latest Move

E-Trade shares have surged 53% in the last four days on a pick-up in trading volume. But similar advances in the past have been quickly followed by sharp pullbacks.

Stock Price

Daily closes and latest: Thursday: $92.88

Source: Bridge