Market Report: Playing Broker Earnings - "We Never Miss"

As you very well know by now, the Fed's decision to cut 50 basis points instead of the anticipated 25 sparked one of the biggest single-day market rallies in five years.

The aggressive move by Ben Bernanke offers Wall Street assurances that central bankers will be vigilant about staying ahead of credit pressures - and this is wonderful news for everyone from bankers to consumers alike.

Now Here's the Thing: I've been talking to many high-level technicians and traders, and yesterday's upside move could just be the beginning of an extended upside run. After all, yesterday's big advance came on relatively low volume, which indicates that the 335-point advance was nothing more than short-covering. Can you imagine what'll happen when strong buyers come in?

As new buyers come in, we could see money flowing into solid stocks with very low valuation ratios, and that's why I feel that the major broker stocks will witness some strong advances to close out the 2007 calendar year.

You see, if you're a broker, yesterday s Fed move is everything that you could have asked for, gift-wrapped in a nice 400-point intra-day Dow advance over the last two trading sessions. And make no mistake, a 50-basis point cut is great news for Goldman Sachs Group (GS - NYSE), especially leading into their Thursday earnings announcement. In fact, I've already received some indications that GS could rally off Thursday's news.

For example, Lehman Brothers (LEH - NYSE) reported a better-than-expected quarter on Tuesday, and this sparked a $5.00 rally in the stock. Then today, Morgan Stanley (MS - NYSE) posted a 17% decline in third-quarter earnings, but nevertheless, shares of Morgan Stanley still advanced on an intra-day basis.

Considering how much broker stocks have fallen over the last 60 days, I feel that any further downside activity will be used as a buying opportunity. After all, since the brokers have a very high level of short interest, any short-covering rally could push them much higher. And that leads us directly into quarterly results from Bear Stearns (BSC - NYSE) and Goldman Sachs (GS - NYSE) later this week.

We all know that BSC is in the worst shape of all the brokers due to their high level of sub-prime exposure, so a weak number could spark some very volatile trading. But when it comes to Goldman Sachs, the story is quite different. Thanks to their investment banking and trading desk operations, they could buck the weak-credit trend and post a strong number - and this could be the catalyst that pushes shares higher. What's more, a high-level trader that I know often quotes his buddies that work at GS, and when it comes to earnings, they say "we never miss."

So no matter what type of reaction we see in GS, I'd use any weakness as a buying opportunity. But don't wait too long, because there's a good chance that shares could advance rather sizably in the coming weeks.

Bryan