The Wagner Daily | November 16, 2004

Commentary:

The Nasdaq chalked up its third consecutive day of gains yesterday, while the S&P 500 and Dow Jones Industrials remained stagnant. Institutional sector rotation into the Semiconductors, along with other tech-related sectors, enabled the Nasdaq to gain another 0.4% yesterday and also close at its intraday high for the third straight day. The Dow Jones Industrial Average gained 0.1%, but the S&P 500 closed flat. Total market volume in the Nasdaq was 6% lighter than the previous day, but still well above average. Breadth in the Nasdaq was firmly positive, as advancing volume outpaced declining volume by more than 2 to 1. Similarly, volume in the NYSE declined by 5%, but advancing volume was a bit higher than declining.

The broad market has been incredibly resilient since Election Day and each of the major indices continue to look quite bullish on their daily and now weekly charts. But, the S&P, Dow, and Nasdaq have each moved quite far away from support of their 20-day moving averages. When in an uptrending market, the 20-day MA generally acts like a magnet that consistently pulls the broad-based indices towards it as it moves higher. When the major indices gain a lot of momentum and gets too far away from the 20-day MA, they rarely will go much higher without first allowing it to rise up to meet the price. This is accomplished either through a “correction by price” or “correction by time.” In the first scenario, the market simply retraces a bit of its rally until it comes down to support of its 20-day MA. In the latter, the market will trade sideways in a tight consolidation pattern, which also enables the various moving averages to rise up and provide support. Taking a look at both the S&P 500 and Nasdaq Composite, notice how far both indices have gotten away from support of their 20-day MAs:

Because both indices have rallied so parabolically, especially the S&P 500, we would use caution in the short-term if long the broad market now. Note this does NOT mean we are bearish on the market because all the daily and weekly charts look quite strong. However, we simply think the risk/reward ratio of entering new long positions in the broad-based ETFs is negative based on the lack of a recent broad market correction. For the short-term, means that the potential amount of loss is greater than the probable amount of profit based on an entry in SPY, for example, at current prices. For the intermediate-term, however, there is no technical reason to believe the market will lose its new-found strength any time soon.

If you want to participate in the market, but take on potentially less risk, consider trading in one of the formerly weak sectors that are now seeing bullish sector rotation and money inflows. The first sector to consider is the Semiconductors, as the $SOX index just broke its weekly downtrend on Friday. This enabled the $SOX index to close with a 1.3% gain yesterday, more than three times the percentage gain of the Nasdaq. This means the Semis are now showing relative strength and will probably fall the least if the broad market corrects over the next few days. Conversely, the index is likely to rally the most if the broad market continues to head higher. This is why we look to buy sectors with relative strength and short those with relative weakness. Another sector that just began to show signs of a bullish reversal are the Pharmaceuticals. We are ready to go with both of these sectors, as we are long SMH (Semiconductor HOLDR) and now PPH (Pharmaceutical HOLDR), both with an unrealized gain.

Today’s watch list:

There are no new plays for today, although we remain long SMH and now PPH (per yesterday’s intraday e-mail alert).

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 = + $296

PPH long (from Nov. 15) –
bought 69.75, stop 68.90, target 71.65, unrealized points = + 0.29, unrealized P/L = + $29

Notes:

Note the new stop on SMH above, as well as the new entry in PPH.

Edited by Deron Wagner,
MTG Founder and
President