Stocks kicked off the new year with a session of impressive, broad-based gains yesterday, after shaking off initial morning weakness. The major indices began the day with an opening gap up above their previous day’s highs, but the indices had fallen into negative territory after the first hour of trading. The tone improved and the broad market began to recover going into mid-day, then rocketed higher after the Fed minutes were released at 2:00 pm EST. The enthusiasm held into the close, as each of the major indices finished near their intraday highs. The S&P 500 powered 1.6% higher, the Nasdaq Composite zoomed 1.7% higher, the mid-cap S&P 400 gained 1.5%, and the Dow Jones Industrials advanced 1.1%. Small-cap stocks demonstrated a splendid bullish reversal, as the Russell 2000 Index shook off an ugly 1% intraday loss and finished 1.6% higher. Overall, yesterday’s intraday volatility was a good example of why we advised caution on both sides of the market this week.
As one would expect to see now that the holiday season has passed, turnover surged higher across the board. Total volume in the NYSE increased by 75%, while volume in the Nasdaq was 32% higher than the previous day’s level. Most importantly, turnover in both exchanges rose above 50-day average levels, confirming the return of institutional activity. The gains on higher volume enabled both the S&P and Nasdaq to register a bullish “accumulation day,” the first clear day of institutional buying in nearly three weeks.
Throughout the latter half of December, we recommended making a watchlist of strong sectors for potential entry after the holidays. Now that the new year has begun, let’s take an updated look at the technical picture of each of those sectors. To refresh your mind, the sectors we liked with relative strength and bullish chart patterns were: Gold Mining ($GOX), Biotech ($BTK), and Pharmaceuticals ($DRG). We also were anticipating a big move in either direction for the Semiconductor Index ($SOX), as it was sitting at a pivotal support level in late December. Of these sectors, one in particular stormed out of the gates yesterday and unequivocally turned in the most impressive sector performance in the stock markets. After wrapping up 2005 with only a very modest correction last month, the Gold Mining Index ($GOX) exploded to a new record high by gaining an astronomical 7.2% yesterday! A $15 per ounce rise in the price of spot gold also enabled GLD, the ETF that mirrors the commodity, to close at a fresh all-time high. The gold index was on our bullish watchlist coming into the new year, but we certainly did not expect it to blast into the stratosphere on the first trading day of the new year! Kudos to traders who were savvy enough to quickly spot the early relative strength and position themselves long in GLD or the gold mining stocks. The $GOX may be a bit extended in the short-term, but the lack of overhead resistance should enable the sector to stay strong in the intermediate-term.
Although it rallied only 0.9% yesterday, the Biotech Index ($BTK) still looks great for further upside this month. Looking at the weekly chart of the $BTK, notice how it has been consolidating near its five-year high for the past eight weeks:
Narrow, sideways consolidation near the highs, as currently seen in the $BTK, usually leads to new highs unless the overall bias of the broad market quickly changes to negative. Assuming that overall market sentiment remains neutral to positive, a corresponding long entry in BBH (Biotech HOLDR) this month looks good. As illustrated below, the ideal entry point in BBH is over the high of its downtrend line from the November 21 high:
The third sector we liked for potential long entry this month was the Pharmaceuticals ($DRG), as well as PPH (Pharmaceutical HOLDR). The $DRG index began to reverse an extended downtrend by breaking out above its 200-day moving average on December 19. It subsequently consolidated near the highs throughout the remainder of December, then began the new year with a 2% gain yesterday. The index closed at a new 15-week high yesterday and continues to show signs of completely reversing last year’s weakness. Regular subscribers were sent an intraday e-mail alert informing them of a new long entry in PPH yesterday, as we expect decent gains in the coming weeks.
In the final paragraph of yesterday’s Wagner Daily, we mentioned that the Nasdaq’s correction down to its 50-day moving average for the first time in months could easily serve as in impetus for a rally. Although a positive reaction to the FOMC minutes provided a good excuse for the afternoon strength, a bigger reason was probably the 50-day MA. Notice how the Nasdaq Composite sharply reversed after running stops below its 50-day MA in the morning:
Yesterday’s action in the Nasdaq was a classic reversal off moving average support. Institutional buying programs often kick in when the major indices initially correct down to support of their 50-day moving averages. Considering the index is now only 1.3% off its prior high from December, we now expect the Nasdaq to probe for a new high over the next week. As such, both QQQQ (Nasdaq 100 Index) and SMH (Semiconductor HOLDR) are two ETFs we like for short-term strength. However, caution should continue to exercised in the intermediate-term.
There are no new plays for today, although we are now also long PPH (per intraday e-mail alert yesterday).
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):
PPH long (500 shares from Jan. 3 entry) –
bought 70.35, stop 69.35, target 75.20, unrealized points = + 0.44, unrealized P/L = + $220
IWM short (300 shares from Dec. 19 entry) –
shorted 67.57, stop 68.55, target 64.25, unrealized points = (0.48), unrealized P/L = ($144)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Because IWM closed in such close proximity to its stop, we have slightly adjusted the stop to give it some “wiggle room” on the open. We also bought PPH per intraday e-mail alert yesterday. OIH short did not trigger and has been removed from the watchlist; the play is no longer valid.
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Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and