The Wagner Daily | March 14, 2005

Commentary:

Despite the announcement of a positive outlook by Intel after Thursday’s close, the Semiconductor Index dropped nearly 3% last Friday, causing the Nasdaq to close 0.9% lower as well. The weakness in the Nasdaq also spread to both the S&P 500 Index and Dow Jones Industrial Average, which lost 0.8% and 0.7% respectively. The broad market attempted a short-lived rally during the first thirty minutes of trading, but the bears quickly took control and set in motion a downtrend that lasted the entire session. Each of the major indices closed near their intraday lows, positioning the market for a negative start today. Excluding Friday, it was still a sluggish week that saw the S&P 500 lose 1.8% and the Nasdaq 1.4%.

The one positive of last Friday’s session, albeit a minor one, is that total market volume in the NYSE declined by 9%, while volume in the Nasdaq came in 2% lighter than the previous day. Given the S&P’s two “distribution days” earlier in the week, it would have been quite negative to see three days of institutional selling within a period of only four sessions. Nevertheless, the price to volume relationship has been rather bearish during the past two weeks. There have been numerous days of institutional selling, but minimal signs of institutional accumulation.

Long-time subscribers of The Wagner Daily newsletter already know that we consistently analyze charts in a factual manner and don’t let our personal opinions get in the way of what the charts are telling us. That being said, let us tell you that the charts are now giving a very mixed picture that is catching many traders on both sides of the market by surprise. Consider, for example, the past two days in the Nasdaq. Last Thursday morning, the Nasdaq was trading 0.9% lower after the first hour of trading, but it reversed in the afternoon and closed the day nearly flat. The performance of the Semiconductor Index ($SOX) that day was even more impressive, as the index reversed from an early 0.6% loss to close with a 1.3% gain. When the markets display this type of bullish reversal, they typically close flat to higher the following day. Furthermore, Intel’s positive mid-quarter comments after Thursday’s close immediately resulted in a very positive reaction to the Semiconductor stocks in after-hours trading, the timing of which should have further boosted the Nasdaq and the Semis the following day. However, within thirty minutes of the market opening on Friday, the Nasdaq and $SOX had ignored both the positive chart patterns and the Intel announcement from the previous day. By day’s end, both the Nasdaq and $SOX had not only registered significant losses, but they also closed below their respective lows of the previous day!

We are not afraid to admit that Friday’s market action was definitely not what we expected, particularly in the $SOX. But, then again, that’s why we always use stops! SMH (Semiconductor HOLDR) hit our adjusted stop on Friday, but our trailing stop strategy still enabled us to lock in a 4% gain on the remaining shares. A bit frustrating, our QQQQ long entry triggered by only a penny and subsequently stopped us out by only two pennies later in the day. Well, that’s trading for you and sometimes these things will happen. There’s not much you can do about it other than follow your plan and obey your stops.

When daily and weekly charts, along with market internals, are showing overall bullish patterns, we position ourselves on the long side of the market through buying the outperforming ETFs. If the technical picture is negative, we simply focus on shorting the ETFs with relative weakness. But there are times when the market is showing so many mixed signals that the best thing to do is sit patiently in cash; we at Morpheus feel that time is now. Aside from choppy and indecisive daily chart patterns of the major indices, individual industry sectors are also very mixed and no one sector is showing clear leadership. The winners of recent months such as Oil, Home Construction, Utilities, and Steel are all correcting sharply, but no new sectors have emerged to take their place. This is one more sign of a confused market.

Institutional traders have the advantage of virtually unlimited capital to put to work in the markets, but one advantage they typically do not have is the ability to sit largely in cash. As a private equities trader, the single biggest advantage at your disposal is the ability to position yourself in cash when the markets become choppy and too indecisive to profit from. Yet, ironically, most private traders we know rarely take advantage of that which is their greatest asset. Don’t try to be a hero by profiting from putting all your capital to work in a market that is confused. Remember instead that professional traders are patient, a quality that rewards them time and again over the years. It is our humble opinion that aggressively trading the markets right now is very dangerous. When market action and chart patterns begin to prove otherwise (which they eventually will), we’ll be right there, ready to jump back in. But until then, we’re enjoying the peace of mind that comes from knowing we won’t be getting chopped up by the markets. Trade what you see, not what you think!

Today’s watch list:

There are no new plays for today (see commentary above).

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:

net P/L = + $184

QQQQ long (from March 11) –
bought 37.80, sold 37.04, points = (0.76), net P/L = ($312)

Open Positions:

unrealized P/L = + $12

Notes:

SMH hit our trailing stop, locking in a 1.2 point gain. QQQQ re-entry triggered and stopped out later in the day. Our only open position is PPH long.

Edited by Deron Wagner,
MTG Founder and
President