Commentary:

Like the previous day, the broad market gapped up last Friday morning, but this time stocks held and added to their gains later in the day. The major indices traded sideways throughout most of the day, but a rally during the final hour pushed the broad market to new highs into the close. Both the S&P 500 and Dow Jones Industrial Average gained 0.8%, while the Nasdaq Composite advanced 0.7%. The smallcap Russell 2000 showed relative strength and moved 1% higher. Midcaps of the S&P 400 lagged behind, as the index gained 0.5%. Each of the major indices closed within the upper 10% of their intraday ranges, but still showed losses for the week. The S&P 500 and Dow Jones both shed 0.3% for the week, while the Nasdaq Composite finished 0.7% lower.

Last Friday saw a huge increase in overall market volume, but it was skewed by two significant events. Total volume in the NYSE surged 62% higher, while volume in the Nasdaq was 37% higher than the previous day’s level. The volume explosion enabled both the NYSE and Nasdaq to register their highest volume levels in five months. The last time that turnover exceeded Friday’s levels in both exchanges was on April 15. Obviously, this made Friday a bullish “accumulation day” across the board, but the volume expansion was largely skewed by two events. First, it was quarterly “quadruple witching” options expiration, a day in which options and futures contracts on indexes and stocks simultaneously expire every three months. This alone typically results in a significant increase in volume, but Friday also marked a change in the way that companies of S&P are weighted. In the past, stocks were weighted based on their market cap, but now shares are weighted based on their float (number of shares available). This adjustment in the S&P’s calculation further added to the increase in turnover.

Most industry sectors closed higher last Friday, with a handful of the sectors we track posting gains of 2% or more. A fresh 17-year high in the price of spot gold helped the Gold Index ($GOX) to once again steal the show. The index powered another 4.3% higher, bringing its three-day gain up to a whopping 10.5%! Our long position in GLD (Gold Trust) is working out great, as it closed at a new all-time high last Friday. We will continue to maximize and protect gains in GLD by trailing a stop higher as it continues its strong uptrend. The chart below shows how GLD, which has only been trading since November of 2004, closed last week at a record high:

Also turning in a strong performance was the Computer Hardware Index ($HWI), which gained 2.8%. The Banking ($BKX), Disk Drive ($DDX), and Airline ($XAL) sectors each gained approximately 2% as well. Interestingly, the Semiconductor Index ($SOX) and Biotech Index ($BTK) both showed relative weakness and gained only 0.3% each. Until the past week, both of these sectors have been exhibiting intermediate-term relative strength. The $SOX, however, did bounced perfectly off support of its 50-day moving average and could attempt a bullish reversal from here.

On the downside, the Home Construction sector ($DJUSHB) lost 2.9%. Long-term subscribers know that we have been bearish on this sector since the beginning of August, when the index fell and stayed below its 50-day MA. The Home Construction index attempted to rally back above its 50-day MA at the beginning of last week, but failed and now appears to be headed back down to its August low. The daily chart of $DJUSHB below illustrates this:

There is not an ETF that specifically tracks the Home Construction stocks, but the Morpheus Capital fund remains short a basket of three different stocks in the sector (HOV, KBH, and WCI). IYR, an ETF that tracks the REIT sector, dropped 0.6% on Friday as well. The Wagner Daily remains short IYR since our initial entry on September 13. The Retail sector ($RLX) also fell 0.5% on Friday, but all the other sectors we regularly follow closed higher on the day.

As for the broad market indices, the Nasdaq Composite closed right at its 50-day moving average, the resistance of which is a likely reason why the index lagged behind the S&P and Dow on Friday. The Nasdaq is now stuck between support of its 20-day MA and resistance of its 50-day MA overhead, so watch for a big move in either direction in the coming days. The same can be said of the $SOX index. Both the S&P and Dow bounced nicely off support of their 50-day MAs last week, but we can’t be too positive on the upside unless the indices break out to new highs. The Dow has resistance of the September 12 high just over the 10,700 level. The S&P resistance is from the September high of 1,241 up to the 52-week high of 1,246. Like we have been preaching for the past two weeks, being simultaneously positioned in sectors with relative strength (such as Gold) and short those with relative weakness (Home Construction) is a much better game plan than attempting to guess whether the broad market will break its prior highs or fall back below its moving averages.

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Today’s Watchlist:

There are no new trade setups for today, as we are now near our max. exposure based on the $50,000 cash position model.

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Daily Reality Report:

Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below:

Open positions (coming into today):
GLD long (800 shares total — bought 500 on Sept. 7 and 300 on Sept. 9) –
bought 44.59 (avg.), stop 44.05, target new high (will trail stop), unrealized points = + 1.23, unrealized P/L = + $984

IYR short (400 shares from Sept. 13) –
shorted 65.77, stop 66.90, target 61.10, unrealized points = + 0.32, unrealized P/L = + $128

PPH long (300 shares from Sept. 13) –
bought 72.78, stop 71.20, target 77.80, unrealized points = (0.23), unrealized P/L = ($69)

Closed positions (since last report):

(none)

Current equity exposure ($100,000 max. buying power):

$84,601

Notes:


We have raised the stop on IYR, as per above. We plan to keep a wide stop on GLD because it closed at a new all-time high and could really gain some momentum from here. We’ll watch carefully for any signs of breakout failure, but it looks great right now.

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Edited by Deron Wagner,
MTG Founder and
Head Trader