The Wagner Daily | March 30, 2005

Commentary:

The broad market continued its recent pattern of strength in the morning, but weakness in the afternoon, as each of the major indices experienced another day of institutional selling. Rather than waiting until the late afternoon for the selling to begin, the bears arrived early yesterday and reversed the morning uptrend after only ninety minutes of trading. From that point forward, the S&P 500, Dow Jones Industrials, and Nasdaq Composite each trended steadily lower as volume surged higher. The S&P 500 and Dow Jones each lost 0.8% yesterday, while the Nasdaq Composite dropped 0.9%.

Total market volume in the NYSE swelled 30% higher, while volume in the Nasdaq came in 20% higher than the previous day. This bearish pattern of higher volume on the broad market’s “down” days and lighter volume on the occasional “up” days has become the norm as of late, so it was not surprising to see another day of institutional selling. Confirming the bearish action was the fact that each of the three of the major indices once again closed at their intraday lows, a continued sign of institutional selling that we discussed in yesterday’s newsletter.

While the recent market weakness has not been pleasant for those who invest or trade on only the long side of the market, yesterday’s continued weakness enabled our IWM short position to hit its original profit target, which netted us nearly a 5-point gain. When we first entered the IWM short on March 16, our target was the area of the prior lows from January, which IWM dropped to yesterday. The chart below illustrates both our original short entry point and the target that was achieved yesterday:

There is a good chance that IWM will break its January lows and continue to slide further, but it will probably at least bounce off this support level for a few days. If it does, we will be watching it for a potential re-entry point on the short side. Since we already covered the IWM short at a key area of support, re-shorting it at a higher price would provide us with a better risk/reward ratio than if we simply maintained the original short position. Yesterday’s weakness also caused our MDY short position to move further “in the money,” but we remain short because it has not yet hit our profit target. The SMH long position we bought on the bounce off the 200-day MA stopped out yesterday, but the loss was less than half of the gain from our IWM short position. Given the divergence between the major indices, it was wise to be positioned on both sides of the market.

On several occasions throughout the past two weeks, we suggested keeping an eye on the Home Construction stocks because the index ($DJUSHB) had been unable to rally back above its 50-day MA. It appears our patience is now paying off because the index just broke down to close at a new 2-month low yesterday. Because there is no ETF that tracks the sector, we remain short a basket of three individual stocks in our hedge fund (KBH, RYL, and LEN). Many subscribers to the MTG Stalk Sheet are now sitting on a profitable short position in RYL, which triggered as a short last week. We expect further downside in the Home Construction sector, so just wanted to give a quick reminder to our subscribers. Individual stocks to consider shorting are (in no particular order): KBH, LEN, RYL, PHM, DHI, HOV, BZH, CTX.

In the March 28 issue of The Wagner Daily, we mentioned that both the S&P 500 and Dow were likely to test support of their January lows in the coming week. The S&P did exactly that yesterday, although it closed a few points above the lowest closing price from January:

Similarly, the Dow Jones closed only 37 points above its January closing low and only 29 points above its 200-day MA:

Finally, the Nasdaq Composite closed firmly below its 200-day MA yesterday and closed at a level not seen since last October. Expect the 200-day MA, which formerly acted as support, to now become a major area of resistance on any rally attempts:

Needless to say, the January lows in the S&P and Dow remain an important pivot point over the next few days. Whether or not the S&P and Dow are able to hold above their January lows is likely to set the tone for the overall direction of the broad market throughout the remainder of the year.

Today’s watch list:

There are no new plays for today, but we remain short MDY. Looking for a decent bounce to consider new short entries in the broad market.

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 = + $494

SMH long (from March 24) –
bought 32.90, sold 32.20, points = (0.70), net P/L = ($216)

Open Positions:

unrealized P/L = + $125

Notes:

IWM hit its profit target yesterday, so we covered it for a 5-point gain. We also lowered the stop on MDY. SMH stopped out.

Edited by Deron Wagner,
MTG Founder and
President