The Wagner Daily | May 27, 2005

Commentary:

Wednesday’s correction turned out to be short-lived, as each of the major indices wiped out the previous day’s losses and then some. The Nasdaq Composite muscled its way higher by another 1.0% and closed at its highest level since March 8. The index has led the broad market by closing higher in nine of the past ten sessions. The S&P 500 registered its highest close since March 15 and gained 0.6% yesterday. The Dow Jones Industrial Average moved 0.8% higher, but closed just below resistance of the 10,550 price area we have been discussing. The major indices also continued to show bullish action by closing near their intraday highs.

Total volume in the Nasdaq increased by 7% over the prior day’s level, enabling the index to notch another bullish “accumulation day” in its belt. The Nasdaq has had six higher volume closes within the past nine “up” days. The only “down” day of the past ten occurred on lighter volume. This type of price to volume relationship is exactly what a healthy market should exhibit. However, the price to volume relationship in the NYSE continues to show relative weakness to the Nasdaq. While the Nasdaq has been gaining on higher volume, the NYSE has been gaining on lighter volume; turnover during the past week has been among the lightest volume days of the year. Then, when the broad market had a minor price correction two days ago, the Nasdaq corrected on lighter volume, but the NYSE did so on slightly higher volume. In yesterday’s session, the S&P gained 0.6%, but volume in the NYSE declined by 2%.

The major divergence in the price to volume relationships of the NYSE and Nasdaq during the past month has also mirrored the wide difference in percentage gains of the S&P 500 and Nasdaq Composite. Since the beginning of the month, the Nasdaq has gained 7.8%, but the S&P 500’s 3.5% gain has been less than half the Nasdaq’s percentage increase. The Dow Jones Industrial Average moved higher by 3.3% during that same period. The divergence between the major indices made the first half of the month quite choppy and indecisive, but the S&P, Dow, and Nasdaq began to trade more in sync with each other since the bullish reversal day of May 16. This leads us to our next point, a question that may be on the minds of a few of our subscribers. . .

A monthly subscriber of The Wagner Daily recently sent us an e-mail inquiring as to why we were short several broad-based ETFs earlier in the month, but did not reverse direction and buy the strong ETFs, such as SMH, that have led the current month’s rally. Since it was a reasonable question that others may learn from, we wanted to share our exact response to that e-mail. It was as follows:

Hi xxxxx, Thank you for your email. The honest and basic answer, and in hindsight, is that we were simply wrong.”

“Regarding SMH, it was never a low-risk buy until it broke out above its 200-day moving average in early May. At that point, the mistake in analysis was made when we were concerned that the relative weakness in the Dow and S&P would hold back the Nasdaq, as often occurs when the major indices get out of sync with each other. You may recall that the Dow remained below both its 50 and 200-day moving averages for quite some time after the Nasdaq and SMH began to rally. When the major indices finally got in sync with each other, it was too late to blindly buy SMH or QQQQ without waiting for some type of correction or at least sideways price action. In hindsight, we could have bought because the semis and nasdaq continued to go straight up, but that is not usually the case. Chasing a trade just because we missed the ideal entry point usually results in compounding the problem even more when the trade goes against you. Professional traders realize they will sometimes miss a move, but when they do, they are patient to wait for the right entry points. This approach sometimes results in small gains when the market makes a big move, but it also prevents big losses when most amateurs are ignoring risk. This same strategy is the reason that the Morpheus Capital hedge fund is showing a gain of 5.9% year-to-date, while both the S&P and Nasdaq are negative on the year. Since inception of The Wagner Daily three years ago, we have been consistently profitable on a monthly basis, but sometimes we are just plain wrong and not afraid to admit it. I hope this helps to clarify the issue. We appreciate your support and loyalty.”

It goes without saying that our main focus continues to be on the Semiconductor Index ($SOX), which stands a high probability it will close the current month above resistance of a multi-year downtrend line, as well as its 200-week moving average. If it does, you can be assured we will be stalking SMH and other tech-related ETFs for entry next week, just as soon as the market provides us with even a slight pause that lasts more than one afternoon. If the broad market does not correct soon, which is highly unlikely, there’s not much we can do about it. However, the biggest reason for our consistent long-term success has been through maintaining a strict discipline to adhere to a strategy that works, and that plan will simply not allow us to aggressively enter new positions that have rocketed straight up for nearly three weeks without even a pause.

Remember that the U.S. stock markets will be closed next Monday in observance of the Memorial Day holiday. Because many traders typically begin their three-day weekends a day early, we expect volume and price action to be light this afternoon. Keep this in mind if you are attempting to buy breakouts in new positions later this afternoon, as light volume breakouts have a tendency to fail. It may be wiser to exercise patience and wait until next Tuesday before entering any new positions. Due to the holiday, The Wagner Daily will not be published on Monday, but regular publication will resume on Tuesday. Have a safe and fun holiday with your families!

Today’s Watchlist:

There are no new plays for today, although we continue to stalk both SMH and BBH for ideal long entry points (see commentary above). We also remain short UTH from our original May 13 entry. As always, we will send an intraday e-mail alert to Wagner Daily subscribers if/when we enter any new ETF positions intraday.

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 = ($103)

Notes:

No changes today.

Edited by Deron Wagner,
MTG Founder and
President