Wagner Daily Lite – Jan. 30, 2012

Equities closed mixed on Friday on light trade. High beta stocks showed the most relative strength as the small-cap Russell 2000, S&P MidCap 400 and Nasdaq managed gains of 0.7%, 0.5% and 0.4% respectively. The S&P 500 finished 0.2% lower, while the Dow Jones Industrial Average closed down 0.6%, near session lows. Gold, real estate, transportation and retail all showed strength on Friday, while defense, utilities, healthcare and oil all struggled.

Market internals finished mixed on Friday. Volume waned on the Nasdaq by 13.9% and on the NYSE by 5.6%. Advancing volume finished at par with declining volume on the NYSE but topped declining volume by a ratio of 1.3 to 1 on the Nasdaq. Not much useful information can be gleaned from Friday’s price action due to the light volume. If one thing is clear, institutions were firmly on the sidelines yesterday.

Several days ago we sold our long position in the iShares Dow Jones Real Estate Index Fund (IYR) as it came within 30 cents of its target. Over the past two days IYR has be consolidating near the price level that we exited. During strong uptrends ETFs tend to “hug” the 10-day moving average. The possibility exists that IYR may not retrace significantly before potentially going higher. We will be watching this ETF closely for a possible buy entry on an undercut of the 10-day moving average or a pullback to the 20-day EMA.

Last Wednesday (January 25th) the SPDR S&P Oil & Gas Exploration ETF (XOP) broke out from a three week consolidation pattern on huge volume and appeared ready to surge to higher ground. However, Wednesday’s move turned out to be a false breakout. On Thursday XOP reversed sharply, taking back all of Wednesday’s gains. On Friday this ETF held support of the 200-day MA and consolidated at this key market. If XOP can move sideways over the next few weeks it could very well establish another buy trigger, such as a cup and handle pattern. As with most ETFs right now, XOP just needs time to set up.

Although the market and many sectors are pinned to overbought levels, there’s been little sign that buyers are leaving the market. Distribution days have been at a minimum, high relative strength stocks continue to hold their breakouts and every dip in the market has thus far been met with buying activity. We remain bullish on the market but a period of modest selling and/or consolidation is needed for new setups to appear. At the current levels, the reward to risk ratio just isn’t in line to consider taking on new positions. A little patience is likely needed until new setups appear.

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