A day of divergence would be the best way to characterize Friday’s trade. Major averages diverged from each other at the close, with some positive and some negative and there was much dissention amongst the ranks of sectors as to whether it was a bull day or a bear day. At the bell, the Dow closed down by 2.46 (losing .02%), the S&P ended ahead by .67 (gaining just .06%), and the “relative strength champ” Nasdaq Composite tacked on 6.06 (adding .29%) for the day. Sector action was extremely mixed, lighting up sector minders like a Christmas tree of red and green. Insurance stocks seemed to lead the advance, playing out a short on the rumor cover on the news scenario as Hurricane Rita barrelled closer to the Texas/Louisiana coastline. Internets and Semis woke up little as well, closing green on the day with tech bellweather (and major SMH component) Texas Instruments (TXN) gaining 4%. Weakness was in energy related issues with the $XOI (Amex Oil Index), $XNG (Amex Natural Gas Index), $DJUSCL (Dow Jones US Coal Index), and the $OSX (Philadelphia Oil Services Sector) all getting taken down a few notches on the day.
As always, Morpheus clientele know to always take volume into consideration in any in depth analysis of market action. Turnover was low yesterday as the market just chopped sideways. Ordinarily this would be considered bullish (ie: low volume consolidation), but lets keep in mind that this action is coming on the heels of some serious selling in the earlier part of last week. As we said earlier in the week, if we take options expiry out of the volume picture on Sept 16th, we have essentially had three distribution days last week out of five trading sessions. This is relatively rare and should not be ignored. This tells us that its getting slightly harder to adopt a bullish bias in the near term going forward, and the shorting of weak sectors (of which there are many currently) into bounces should not be ignored as a possible trading strategy in your arsenal.
One of the weaker groups currently is Retail, as evidenced by the chart below of the $RTH (Retail HOLDR).
The highest probability trade setup is always one in which the fundamental and the technical are in perfect alignment. This means for a short setup, a situation where we are more than likely to see earnings deterioration going forward. When buying any stock you are not really purchasing a slice of the assets of the company, but rather the present value of some multiple of earnings going forward. In essence, you buy stocks for growth. In these volatile markets, when there is even the slightest hint that growth will slow down or even contract, stocks will sell off. With energy prices taking a larger and larger chunk out of consumers wallets as of late, it makes sense at this juncture that retail stocks are coming under pressure. We have not even begun to see real deterioration in earnings in the sector yet, but some warnings across the board have already been issued and the writing is on the wall, so to speak. Remember, like with the strength in Insurance on Friday, its “short on the rumor, cover on the news”. This would mean that once retail earnings already start to come out negative in subsequent quarters, don’t be surprised if retail stocks start to catch a bid by then. For now however, ahead of the actual news, they look like a ripe short. RTH (Retail HOLDR) is of course a proxy for the sector. The chart above (daily) shows a down trend annotated by the upper blue line terminating in $96 area. The lower blue line is the 200 day moving average which as we know should act as strong resistance when approached from below. The chart below (weekly) shows a possible target for the short. Prior weekly support at $86 (also confluence of weekly 200ma in same area) would be a likely pivot.
We’ll continue to monitor the situation in the retail sector going forward and specifically RTH for possible entry soon as the bounce brings price action closer to the downtrend line on the daily.
FXI – Xinhua China 25 Index Fund
Trigger = above 63.20 (above September 20 high)
Target = 68.00 (to set new 52 week highs over the prior pivot of 65.90)
Stop = 61.93 (below 50 MA daily)
Since its inception in mid October of 2004, the Xinhua China 25 Index Fund (FXI) has performed rather well. This emerging market ETF is currently consolidating nicely after a strong move higher since June of this year. FXI has now found support at its 50ma daily (red line) and has broken the downtrend of the pullback move. A break at the trigger price should be the catalyst for the next move upwards. The position size will be 300 shares if it triggers.
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 (600 shares remaining, sold 200 on Sept. 22) –
bought 44.59 (avg.), stop 45.00, target new high (will trail stop), unrealized points = + 1.67, unrealized P/L = + $1,002
IYR short (200 shares remaining, covered 200 on Sept. 22) –
shorted 65.77, stop 64.60, target 61.10, unrealized points = + 3.07, unrealized P/L = + $614
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
We will continue to hold the remaining three quarters GLD through this pullback as we are looking for a larger move. IYR is continuing to show relative weakness and should move to below the pivot area of weekly support to find our target.
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Edited by Deron Wagner,
MTG Founder and