The Wagner Daily


The broad market spent the first half of the day trading in a narrow, sideways range, but the bulls returned in the afternoon and pushed the major indices into positive territory. Both the S&P 500 and Nasdaq Composite closed higher for the fourth consecutive day and registered gains of 0.2% and 0.4% respectively. The Dow Jones Industrial Average was practically unchanged (less than 0.1% lower). The S&P Mid-Cap 400 and Russell 2000 Small Cap indices each moved less than 0.1%. All the major indices closed in the upper half of their intraday ranges, but did not close at their highs as they had done for each of the prior three days. Considering the broad market’s impressive strength since the July 7 reversal day, it was not surprising to see a smidgeon of closing weakness after trending higher for four consecutive sessions.

The Philadelphia Semiconductor Index ($SOX) powered 1.0% higher to its seventh straight day of gains. Our long position in SMH (Semiconductor HOLDR) is now showing an unrealized gain of 4.7%, but we will continue trailing a stop to maximize profits on the way to our price targets. The Amex Biotech Index ($BTK) closed fractionally lower, but BBH still gained another 2 points. Genentech, Inc. (DNA) currently represents a 42% weighting in BBH, so its post-earnings gain of 3% helped to lift the Biotech HOLDR. Per intraday e-mail alert to Wagner Daily subscribers, we sold the first half of our BBH position for a gain of 10.5 points (6.2%), and have also trailed the stop higher on the remaining shares. Other strong sector performers yesterday were Networkers ($NWX), Oil Service ($OSX), Computer Software ($GSO), and Retail ($RLX), all of which closed at least 1% higher. Transportation ($DJU) and Healthcare ($HCX) were among the few sectors that closed lower.

In contrast to all the other “up” days since July 7, volume in the NYSE increased by 2% yesterday, while total volume in the Nasdaq declined by 7%. This made yesterday a bullish “accumulation day” in the NYSE due to the uptick in volume and positive closing price in the S&P. Despite the Nasdaq’s slight volume decline, three of the Nasdaq’s last four “up” days have nonetheless occurred on higher volume. Two of the last four “up” days in the NYSE have been on higher volume. Market internals remained positive yesterday, although advancing volume exceeded declining volume in both exchanges by less than 2 to 1 this time.

As long-term subscribers may have noticed, we have begun to focus more on trading the sector-specific ETFs rather than the broad-based ETFs such as SPY, DIA, or QQQQ. When the major indices are steadily trending in one direction or the other, the broad-based ETFs are an ideal trading vehicle, but choppy and range-bound markets are likely to result in many stop-outs of the broad-based ETFs. The solution therefore is focus on specific industry sector ETFs that are showing relative strength or weakness to the broad market, as we did by taking long positions in BBH and SMH last month. Many people are interested in trading the sector-specific ETFs, but don’t know which ones are ideal for short to intermediate-term trading. If you fall into that category, the following information we have prepared will be quite useful.

There are many different families of sector-specific ETFs, with companies launching new offerings at a rapid pace, but we like to focus on sector ETFs from three different families: HOLDRs, iShares, and Select Sector SPDRs.

One of the most popular family of ETFs belong to a group collectively known as HOLDRs, an acronym that stands for HOLding company Depositary Receipts (pronounced “Holders”). These securities represent ownership in the common stock or American Depositary Receipts (ADRs) of specified companies in a particular industry, sector or group. Issued by Merrill Lynch, there are currently 17 different HOLDRs. Of these, 15 track specific industry sectors and two track broad market indexes. Although limited to only 15 industry sectors, many of the HOLDRs have high levels of average daily volume, causing them to be favored by traders.

Barclays Global Investors, the company that created the first index strategy in 1971, launched the iShares family of exchange traded funds in the year 2000. iShares have gained popularity because the family consists of broad-based, industry sector, international, and fixed-income ETFs. However, the less popular iShares sometimes have wide spreads due to light average daily volume levels.

There are 9 different sectors that comprise the Select Sector SPDR family of ETFs, which is the same company that brought you the first domestic ETF; the S&P 500 Tracking Stock (SPY). Like the HOLDRs, the Select Sector SPDR family of ETFs is small, but they are quite popular nonetheless.

There are a total of 51 different industry sector ETFs between the three families discussed above, but we have narrowed this down to show you only the ETFs within the three families that have a 50-day average daily volume of at least 200,000 shares. The table of ETFs below will soon be integrated into the all-new MTG Position Model, which MTG expects to launch at the beginning of next month. Notice on the table below that some sectors, such as Biotech, have more than one major ETF that tracks it:

Although the table above only lists ETFs that trade at least 200,000 shares per day, don’t get too obsessed with actual liquidity issues in ETFs. Unlike individual stocks, which you probably would not trade if the average daily volume was too low, remember that all ETFs are synthetic instruments. As such, you will notice that high average daily volume is less important for ETFs than for individual stocks because the price manipulation that you typically see in low volume individual stocks is not a factor with ETFs. This is because the price of an ETF, whether a HOLDR, iShare, or SPDR will closely mirror the price of the underlying stocks that comprise it. Therefore, even if no trades are being executed in a low-volume ETF on a given day, the bid and ask prices will rise and fall as the prices of the underlying stocks change. The table is limited to stocks over 200k average daily volume only to give you an idea of which sector ETFs are the most popular.

I also want to bring your attention to the two separate “Avg. Daily Vol.” columns on the table above. The first column, “Avg. Daily Vol. (July 2005),” obviously displays the current average volume for each ETF, while the column to the right, “Avg. Daily Vol. (July 2003),” shows the average volume of those same ETFs only two years prior. Of the 24 ETFs listed in the table, only 3 have seen a decline in average volume from two years prior. The rest have all seen a major increase, many sporting 300 – 400% (or more) surges in average volume within only the past two years. Consequently, these numbers confirm any general comments you may have heard about the recent growth of interest in ETFs.

As for the broad market analysis, the same short-term support and resistance levels we discussed in yesterday’s Wagner Daily are valid going into today. Because the market has trended higher for the past four days without a pause, a small correction today would not be surprising. A correction, of course, does not mean the markets will close significantly lower, as a sideways consolidation would serve as an equally effective correction by time. If you are holding winning long positions, continue to trail your stops to protect profits and maximize gains, but today is probably not the most ideal time to be entering new positions. Every index except the Dow is looking good on the long side, so forget about shorting anything here unless you are just looking to “hit and run” for a quick intraday profit.

Remember that earnings season is upon us, so please be aware of potential earnings reports before entering new positions.

Today’s Watchlist:

There are no new trade setups for today, but we remain long both BBH and SMH.

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
. Net P/L figures are based on the quantity of shares represented
in the MTG
Position Sizing Model

Closed Positions:

    BBH long (HALF position, from June 16) –
    bought 167.95, sold 178.45, points = + 10.50, net P/L = + $524

Open Positions:

    BBH long (HALF position, from June 16) –
    bought 167.95, new stop 172.70, target (new highs, will trail stop), unrealized points = + 11.55, unrealized P/L = + $577

    SMH long (from June 1) –
    bought 34.82, stop 34.10, first target 38.85, then 44.90, unrealized points = + 1.65, unrealized P/L = + $495


Per intraday e-mail alert, we sold half of the BBH position yesterday and have raised the stop on the remaining half position. We have also added a second price target of 38.85 on SMH, which is where we anticipate selling the first half of the position.

Edited by Deron Wagner,
MTG Founder and
Head Trader