The bear market in brokerage stocks may be weakening, but it’s not over yet, suggests a new report from independent investment research firm BCA Resarch

“Capital market stocks have absorbed the recent spate of well-advertised negative profit results, raising the question of whether the underperformance phase has ended,” BCA says in a research note. “While some positive developments have occurred, it is still a bit too soon to call for a bottom.”

“Investors economic expectations, as measured by the momentum in the stock-to-bond ratio, remain sluggish and warn that the much anticipated second half 2005 revival in new issuance may be delayed,” it says. “As such, lucrative underwriting fees are not ready to take over as a key profit driver.”

“On the bright side, bank loans for securities have come storming back in the past few weeks, suggesting that hedge fund activity may be picking up, a boon to the industry’s prime brokerage operations,” BCA concludes. “Adding it all up, the bear market is in the late stages, but is not over just yet. Underweight positions are still recommended, but we are looking to buy on weakness.”