The Wagner Daily | October 13, 2005

Commentary:

To the delight of bears but dismay of bulls, the broad market maintained its smooth and steady downtrend that began on October 4. Like the previous day, stocks attempted to rally on the open, but the buying pressure lasted only thirty minutes. The major indices spent the remainder of the day grinding lower before eventually closing near their intraday lows. Small and midcap stocks again showed the most relative weakness. Both the Russell 2000 and S&P 400 indices plummeted 1.3% yesterday. The Nasdaq Composite fell 1.1%, the S&P 500 0.6%, and the Dow Jones Industrials 0.4%. Former market leading sectors such as Oil, Utilities, and Building Materials were among the biggest losers yesterday, but positive reciprocal money flow into other sectors could not be found. Every strong market consists of at least a few market-leading industry sectors, but there simply aren’t any right now. Instead of institutional sector rotation that occurs in healthy markets, we are simply seeing broad-based distribution.

As we have become accustomed to seeing on most of the recent down days, total market volume increased in both exchanges. Turnover in both the NYSE and Nasdaq was 10% higher than the previous day’s levels. Declining volume exceeded advancing volume by a margin of more than 3 to 1 in both exchanges. The broad-based losses on higher volume gave both the S&P and Nasdaq another bearish “distribution day.” Five of the S&P’s last seven down days have occurred on higher volume. This is a clear sign that the market’s recent losses were not a result of small retail selling, but rather the result of institutional selling. Because institutional activity makes up more than 70% of the stock market’s daily volume, attempting to trade in the opposite direction of mutual funds, hedge funds, and other institutional players is always a losing proposition.

When the major indices rallied into resistance of their daily downtrend lines at the beginning of the month, we made a decision to short a few of the broad-based ETFs. Because IWM (iShares Russell 2000) and MDY (Midcap S&P 400 SPDR) were market leaders in the broad market throughout the prior bull market, we anticipated they would also be among the biggest losers if the weakness in the broad market gathered downside momentum. Fortunately, this worked out well because IWM and MDY have posted the largest percentage losses of the broad-based ETFs this month. Although both ETFs are still looking pretty bearish on their charts, we made a judgment call to take profits on those two short positions into yesterday’s weakness because both could easily bounce from here. Per intraday e-mail alert to subscribers, we covered the remaining shares of our IWM short position for a profit of 4.48 points and covered half of the MDY short position for a gain of nearly 2 points. We remain short a half position of MDY with a marked to market gain of 2.5 points and have also tightened the stop to protect the profit. GLD, the ETF that tracks the price of spot gold, hit our trailing stop of 47.26 yesterday, enabling us to lock in a substantial gain of 6% on that trade.

As predicted in the October 11 issue of The Wagner Daily, the Semiconductor Index ($SOX) sold off down to support of its 200-day moving average yesterday, but closed just above it. This is significant because the Nasdaq is so heavily weighted with semiconductor stocks. Therefore, if the $SOX can hold above its 200-day moving average, it could serve as an impetus for the Nasdaq to bounce off its lows. However, we still do not recommend going long any of the broad-based ETFs unless you are only looking to play a one to two day bounce. And if you do, be sure to wait for confirmation of a bounce rather than trying to blindly guess where the bottom may be. Below is a chart of the $SOX index, which you should follow closely today:

Taking a quick look at the daily charts of the major indices, even a novice technical analyst will easily see the broad market is in bad shape. The S&P 500 Index has closed lower in seven of the past eight sessions, while the Nasdaq is now showing a month-to-date loss of 5.3%. Every one of the major indices is now below their 200-day moving averages and many have broken below support of their multi-year uptrend lines. Drilling down to look at the performance of individual stocks, you will also see that a vast majority of breakouts in nearly every sector are failing, while bullish consolidations near the highs are few and far between. Obviously, being long any sector for anything more than a day trade right now is a highly risky proposition. The broad market will probably bounce from oversold conditions within the next day or two, but the overall trend still remains down. Although it is a highly overused cliche, it is quite effective to always remember that the trend is your friend! Don’t fight it.

Today’s Watchlist:

We have a few new short setups in mind, but we need to see an upside correction in the broad market before entering them. As always, we will send an intraday e-mail alert if/when we enter any new trades today. If not already short, being in cash is your best bet.

Daily Performance 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):

stop 124.70

, unrealized P/L = + $506

Closed positions (since last report):

, net P/L = + $1,584

IWM short (250 shares from Oct. 4 entry; 250 shares already closed) –
shorted 66.43, covered 61.95, points = + 4.48, net P/L = + $1,115

MDY short (200 shares from Oct. 10 entry) –
shorted 125.78, covered 123.85, points = + 1.93, net P/L = + $382

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

$24,650

Notes:

Click
here for glossary and explanation of terms used in The Wagner Daily

Click here to view MTG’s past performance results (updated monthly).

Edited by Deron Wagner,
MTG Founder and
Head Trader