The Wagner Daily | September 21, 2004

Commentary:

Yesterday was a clear example of the broad market divergence we have been discussing and predicting over the past two weeks. The S&P 500 and Dow Jones Industrial Average both showed weakness yesterday and lost 0.6% and 0.8% respectively. The Semiconductor Index ($SOX), however, completely diverged from that weakness and chalked up a 2.9% gain. As a result, our long position in SMH (Semiconductor HOLDR) now has a multi-point unrealized gain. The strength of the tech-related sectors, but weakness of most other sectors, caused the broader-based Nasdaq Composite to close mixed, but with a loss of only 0.1%. Volume in the Nasdaq declined by 5%, while volume in the NYSE was 17% lighter than the previous day. Because the major indices closed lower, but on lighter volume, yesterday was not a “distribution day” that would have signified heavy institutional selling.

As expected, the $SOX index rallied above resistance of its 50-day moving average yesterday. July 1 of 2004 marked the last day the index was trading above its 50-day MA, so yesterday’s breakout should certainly attract buying interest. The $SOX also closed just above resistance of its prior high from last week (the horizontal line on the chart below):

Yesterday’s breakout in the $SOX should enable the index to rally at least up to its prior high of 419, which was set on July 30. The prior high from the end of July also co-ordinates with a price of around $33 in SMH, which is the area of our price target in the long position. Going into today, the September 13 high of 398 should act as initial support. Below that, the 50-day MA is an even more important support level now.

While the strength in the $SOX was impressive, the Dow Jones showed an equal amount of weakness. Since breaking support of its intermediate-term uptrend on September 15, the Dow has been showing major relative weakness to the Nasdaq. Yesterday’s 80-point drop in the Dow put the index back below support of its 50-day moving average. The index also remains below its 200-day MA, which it fell below last week. Take a look:

If not for the strength of the Semis, we would be shorting the blue chips and Dow-type sectors. However, it is rare for the broad market to show weakness for an extended period of time when the Semis are showing strength. Generally speaking, the $SOX leads the broad market, so we would use caution on any short positions. Nevertheless, the Dow (DIA) is definitely one of the best looking ETFs to be short, IF you want to be short. We vote for being long the Semis instead.

As you may already be aware, the Feds are meeting today to discuss and monetary policy and are largely expected to raise interest rates by 1/4 point. If this occurs, we don’t expect any major reaction from the markets because that is the consensus on The Street. But, any change to what is already expected could cause a lot of volatility in the markets, so just beware of that possibility when the FOMC announces their decision on interest rates at 2:15 pm EST today.

Today’s watch list:

Staying with the full position of SMH, as per below.

Daily Reality Report:

Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from The
Wagner Daily (Intraday Real-Time Room trades are reported separately in The
Wagner Weekly). Net P/L figures are based on the quantity of shares represented
in the MTG Position Sizing Model.

Closed Positions:

(none)

Open Positions:

unrealized P/L = + $465

Notes:

Yesterday, we mistakenly sent an intraday e-mail alert informing subscribers we were adding to our half position of SMH so that we would once again have a full position. However, we already did so last Friday afternoon, one hour before the close. So, please ignore yesterday’s intraday e-mail alert, as we already had a full position of SMH. We apologize for any confusion on this internal oversight.

Edited by Deron Wagner,
MTG Founder and
President