The Wagner Daily


Yesterday was a day of broad market divergence, as the S&P 500 and Dow Jones Industrial Average lost 1.0% and 1.1% respectively, but the Nasdaq Composite continued to show relative strength and closed only 0.4% lower. The broad market spent the first half of the session trading in a choppy, mostly sideways direction, but the bears took control in the afternoon, causing the major indices to trend lower into the close. Both the S&P 500 and Dow Jones Industrial Average closed at their intraday lows of the previous day, but the Nasdaq Composite closed in the middle of the prior day’s range.

Total market volume in the NYSE rose by 12% yesterday, but turnover in the Nasdaq only increased by 1% over the previous day’s level. Nevertheless, the higher volume selling made yesterday another bearish “distribution day” in the broad market, the second such day of institutional selling within the past three sessions. Since the recent broad market rally began on April 29, we have yet to see any serious signs of institutional accumulation. There were a few days of higher volume gains following the April 29 follow-through day, but volume on those days never moved much above average levels. Since putting in a short-term top on May 9, the S&P has seen two days of higher volume losses and one day of lighter volume gains. It seems apparent that institutions have not been overly anxious to buy stocks, but are still selling into the strength of any significant rallies instead.

The most notable thing about the broad market action of the past several days has been the divergence between the major indices. Throughout the past week, the Nasdaq Composite has traded mostly sideways, but both the S&P 500 and Dow Jones Industrials have trended lower. Since May 4, the S&P 500 has lost 1.4% and the Dow Jones Industrial Average has lost 1.9%. The Nasdaq Composite, however, has actually moved fractionally higher during that same period. Below are daily charts of the S&P and Nasdaq that illustrate the divergence. Notice also how the S&P 500 closed right on support of its 200-day MA yesterday:

It’s important to be aware of the divergence so that you can position yourself on the long side of sectors that are showing relative strength and/or the short side of those sectors with relative weakness. Institutional sector rotation constantly causes money to flow from one industry sector to another and your job is simply to trade in the same direction as that money flow. If you are looking for long positions, we have noticed that money now appears to be flowing primarily into the tech-related sectors such as Semiconductors ($SOX), Computer Hardware ($HWI), and Networking ($NWX). More specifically, the traditional large-cap names like Intel and Cisco are seeing more interest than newer, growth-oriented companies. Dell Computer (DELL) reported earnings after yesterday’s close and was trading significantly higher in the after-hours market despite merely meeting earnings expectations. This, however, makes sense considering that institutional interest currently appears to be focused on the large-cap tech names.

On the short side of the market, consider the formerly leading sectors such as Oil ($XOI), Oil Service ($OSX), and Utilities ($DJU), all of which sold off sharply yesterday. Other “old-economy” industry sectors such as Banking ($BKX) and Retail ($RLX) are also showing bearish action on their weekly charts. The DJ U.S. Home Construction Index ($DJUSHB), which we have been closely following for the past several months, dropped nearly 4% yesterday and is now poised to make a major leg down on its weekly chart.

Because the major indices are diverging, action in the overall broad market is likely to remain choppy and erratic. Rather than trading numerous broad-based ETFs, consider focusing instead on industry-specific ETFs. Long ideas are the Semiconductor HOLDR (SMH) and Biotech HOLDR (BBH), while short ideas are the Utilities HOLDR (UTH) and Oil Service HOLDR (OIH). We remain short DIA (Dow Jones Indu. Tracking Stock) and are now also short XLF (S&P Financial Spyder), which we entered yesterday.

Today’s Watchlist:

UTH – Utilities HOLDR

Trigger = below 103.70 (below the 50-day MA)
Target = 99.10 (support of the March 2005 low)
Stop = 105.60 (above yesterday’s high)

Notes = The formerly market-leading Utilities sector has begun to show signs of institutional distribution, so we are looking to profit from a rotation out of that sector. We will short UTH on a break below its 50-day MA.

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:


Open Positions:

    DIA short (from May 10) –
    shorted 103.17, new stop 103.69, target 97.20, unrealized points = + 1.24, unrealized P/L = + $248

    XLF short (from May 12) –
    shorted 28.63, stop 29.28, target 27.10, unrealized points = + 0.15, unrealized P/L = + $90


XLF short triggered per yesterday’s newsletter. Also note the new stop on DIA above.

Edited by Deron Wagner,
MTG Founder and