Institutional sector rotation abound ($DUG, $XRT)

Stocks ended the session mixed on Friday after showing early promise. The market gapped up at the open but faded into the close, leaving all the major indices well off session highs and the Nasdaq in the red. The tech-rich Nasdaq was higher by as much as 0.9% yesterday before fading to post a 0.2% loss. The small-cap Russell 2000 ended higher by 0.6% and was followed closely by the Dow Jones Industrial Average, which posted at 0.5% gain. The S&P Midcap 400 landed a 0.3% gain while the S&P 500 closed just over 0.1% higher. Some of the day’s big losers included coal, gold miners, computer hardware, semiconductors and airlines. On the positive side, the homebuilder and software sectors showed relative strength throughout the session.

Although Friday was an options expiration day, volume ended the session mixed. While volume on the Big Board spiked by 17.4%, it eased by 3.8% on the Nasdaq, allowing the higher beta index to avoid distribution. Advancing volume topped declining volume on the NYSE by 1.3 to 1 but underperformed on the Nasdaq by a margin of 1.2 to 1. Despite the higher volume and higher advancing volume, it would be hard to consider Friday as an accumulation day on the NYSE, due to its weak price action into the close.

On Friday, the inversely correlated ProShares UltraShort Oil and Gas ETF (DUG) formed a reversal candle, as it undercut support at the 3-day low but rebounded to close near the day’s high. A move above the four-day high of $24.81 could present a buy entry trigger for DUG. Exact entry and exit details are listed below for regular subscribers of The Wagner Daily:

Since pulling back into its 50-day MA on April the 10th, the SPDR S&P Retail ETF (XRT) has demonstrated relative strength to the broad market. Unlike the S&P 500 or the Nasdaq, XRT has reclaimed it 20-day EMA. If the market reverses higher, XRT should be one of the first ETFs to seek new highs. A move above the four-day high of $61.66 could present a buying opportunity in XRT.

Institutions (banks, mutual funds, hedge funds, etc.) appear to be rotating funds around various sectors in the market. This is supported by the fact that both the short and long ETF positions in our model portfolio are acting well and showing unrealized gains. Since we are near important support levels on all the major indices, we are keenly aware of the potential for a sharp move in either direction. Although it appears that the market could be headed lower, don’t be surprised if we see an undercut and sharp reversal near the current support levels. Being simultaneously positioned long and short (long relative strength and short relative weakness) while the major indices are in “no man’s land” is an ideal way to minimize risk, while taking advantage of clear divergence occurring due to institutional sector rotation as well.

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