Commentary:
All eyes were on the Fed yesterday as the FOMC made their decision on interest rates, raising the fed funds rate by .25% to 3.75%. For the first time since the tightening cycle began, there was some dissention in the ranks as to whether or not the fed would or would not raise rates at this juncture. This difference of opinion came from some fed watchers thinking that the economy could use a break from the tightening, due to possible adverse effects of hurricane Katrina on the nation’s economy going forward. As we now know, the fed thought differently, and clearly stated that “while these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee’s view that they do not pose a more persistent threat.” The end result was another quarter point increase which led to a 2:15 late day selloff that deflated the Dow by 76.11 (.72%), the S&P 500 by 9.68 (.79%), and the Nasdaq Composite by 13.93 (.65%). Selli!
ng was broad based, but concentrated heavier in the homebuilders than in most other sectors. The $DJUSHB which tracks the builders stocks was off by almost a full 5 percent by the time the closing bell rang at 4pm. Although Morpheus Capital and this publication have been bearish on this sector for some time now, a look at the chart below may tell us that the accelerated selling in this sector is just about to begin.
Notice the trendline break in the weekly chart above. The trendline is annotated in blue and has been in place since October of 2004 (almost a full year at this point). Yesterday’s weakness in the sector contributed to a confirmed close below this weekly trendline. Whenever trendlines on weekly charts are violated to either side, its a technical event that should not be ignored. Remember, the importance or “weight” of a trendline break increases in direct proportion to the timeframe in question when trying to discern the trend. Dailies over hourlies, weeklies over dailies, etc. As you can see from the graphic above, the homebuilders index could easily retrace to its next level of support at the 780 area, which would be a drop of 15% from current levels. As we know, unfortunately no ETF tracking the entire basket of builders but you can always “do it yourself” with a synthetically created ETF basket of RYL, LEN, TOL, CTX, BZH and others.
Although volume came in heavier yesterday, increasing by 9% on the NYSE and 16% on the Nasdaq (giving us a confirmed distribution day), there was so much early strength in biotechs that the index managed to close above its open even with the late day Fed selling. Notice from the chart below how well BBH which tracks the $BTK is holding up here in relation to other sectors which are relatively weaker. Although we recently closed out a very profitable long position in BBH, we may be considering a reentry on the ETF soon as the biotechnology index seems to be extremely resilient in the face of a rather shaky market.
It should be clearly noted at this juncture that the isolated strength in the biotechs and energy sectors is very indicative of what is happening in the market as a whole. To be more specific, although there is a longer term uptrend still in place here, the advance is certainly not characterized as “broad based”. This means that not all sectors are moving in sync with each other as they were when the markets staged their last meaningful advance in the late 1990’s. In direct contrast to the strength in the oil and gas indexes is very weak performance in a wide range of sectors such as housing, chemicals, automakers, internets and retail. Remember that this often creates what we call a “tug of war” and makes trading from either side difficult. The daily chart of the SPY below illustrates this perfectly and reminds us as always that we must “trade what we see and not what we think”.
Today’s Watchlist:
There are no new trade setups for today although we may be looking for a reentry on the long side in BBH soon and also a technical bounce to short RTH which set a new swing low yesterday and is showing extreme relative weakness.
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 = + 1.64, unrealized P/L = + $1,312
IYR short (400 shares from Sept. 13) –
shorted 65.77, stop 66.90, target 61.10, trend lined points = + 1.25, unrealized P/L = + $500
Closed positions (since last report):
-
PPH long (300 shares from September 13)
bought 72.78, sold 71.20, net P/L = ($474)
Current equity exposure ($100,000 max. buying power):
- $61,980
Notes:
GLD is holding up very well here and we are looking for the larger move on this ETF which could take it as high as $50 near term. IYR should move agressively to the $63 area at this point as new swing lows were made on yesterday and that price would indicate the next pivot point.
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Edited by Deron Wagner,
MTG Founder and
Head Trader