The Wagner Daily | January 13, 2006

Commentary:

The Nasdaq snapped its seven-day winning streak yesterday, but turnover declined as stocks corrected in an orderly fashion. The major indices once again traded in a narrow, sideways range throughout the first half of the day, but the bears arrived with two hours remaining in the session. It was opposite of recent market action in which stocks had been lifted by strength in the late afternoon. The S&P 500 and Dow Jones Industrials closed lower by 0.6% and 0.7% respectively, while the Nasdaq Composite fell 0.6%. Considering that the tech-heavy Nasdaq had gained 5.7% in the first seven days of 2006, yesterday’s 0.6% loss was nominal. The small-cap Russell 2000 and mid-cap S&P 400 indices took a rest and corrected from their record highs, losing 0.6% each.

On a technical level, the most important thing about yesterday is that volume declined in sync with the drop in stock prices. Total volume in the Nasdaq was 15% lighter than the previous day’s level, while volume in the NYSE declined by 5%. This is significant because it indicates that institutions, who make up more than half of the market’s daily volume, were not heavily selling shares of stock. Rather, the drop on lighter volume tells us the bulls were merely taking a break, but the bears were not waiting to break down the back door. Confirming this was the fact that the Nasdaq’s market internals were barely negative. Declining volume exceeded advancing volume in the Nasdaq exchange, but only by a margin of less than 3 to 2. NYSE internals were slightly worse, but still not overly bearish.

When The Wagner Daily newsletter was launched back in 2002, Barclays’ iShares, S&P Select Sector SPDRS, and Merrill Lynch’s HOLDRS were the only major families of exchange traded funds (ETFs) that covered a wide array of industry sectors. As such, our sector analysis over the past three years has primarily focused on ETFs from within those families. Since then, the growing popularity of ETFs has prompted firms to bring new families of ETFs to the marketplace. Many of these new ETF families are still obscure, but one group that has attracted our attention over the past few months are the PowerShares family of exchange traded funds.

If you visit the PowerShares web site and browse the investment products, you will notice that their offerings are unique in several ways. First, they have a handful of sector ETFs that are not represented by any of the other families. Nanotech (PXN), Home Construction (PKB), Food and Beverage (PBJ), and China (PGJ) are just a few of the interesting sector ETFs that are not found anywhere else. The iShares family of funds offers an ETF that tracks the Chinese Xinhua 25 market (FXI), but the PowerShares China ETF (PGJ) tracks a diverse mix of sectors within mainland China instead of just one index. In addition to more unusual sectors such as Nanotech and Water Resources, the PowerShares family of ETFs also covers the mainstream sectors such as Semiconductors (PSI), Oil and Gas (PXJ), Biotech (PBE), and Utilities (PUI).

In addition to covering sectors that are missed by other ETF families, one thing we really like about the PowerShares is the diversity of the underlying stocks within each sector. Unlike the HOLDRS, in which two or three stocks typically represent 30 to 50% of the ETF value and only 20 stocks comprise the entire value of the ETF, the PowerShares ETFs are truly represented by a large number of stocks. Further, PowerShares are able to change the selection of stocks within each sector ETF, unlike the HOLDRS in which the same companies have been represented since they were launched. This provides true diversity to the PowerShares.

Because the PowerShares family of ETFs was only launched in the middle of last year, average daily volume levels are obviously much lower than the equivalent sector ETFs in the iShares or HOLDRS families. However, it is important to remember that the average daily volume level in an ETF is much less significant than the average volume of an individual stock. We would never consider trading a stock with an average daily volume of less than 100,000 shares because the demand may not be present when it comes time to sell the shares. But with an ETF, that is never a problem. Remember that the bid/ask prices of an ETF will change throughout the day, mirroring the formulated prices of the underlying stocks, regardless of whether or not any buyers or sellers are present. As such, there will always be a market when you want to trade in an ETF. Actual liquidity is not a factor on ETFs, even if they trade less than 100,000 shares per day, but we confess that the spreads may sometimes be more than a few pennies wide. If this occurs, using a limit order will easily solve the problem.

We wanted to bring our subscribers up to speed on the PowerShares because we have begun to monitor the charts of those ETFs and will be presenting them as “official” trade setups in the near future as well. Although we will continue to stalk the iShares, S&P Select Sector SPDRS, and HOLDRS, the PowerShares family of ETFs provides us with yet another weapon in our arsenal. Subscribers should be on the lookout for a brand new, updated sheet that displays the symbols for each of the ETFs we follow, grouped together by industry sector. The sheet will automatically be e-mailed to all regular and monthly subscribers upon completion.

Be aware that quarterly earnings season kicks into gear next week and, as always, is likely to have a large effect on the direction of the market. The major indices have obviously been acting very well in the new year, and yesterday’s light volume correction did not change this fact. However, it is prudent to be aware of major companies that are reporting because the reaction to their reports typically affects the entire sector in which they belong. If there are any sector ETFs you are presently long or considering buying, we recommend you review next week’s earnings dates on one of numerous financial websites. Yahoo! Finance is a free one that provides a comprehensive earnings calendar.

Today’s Watchlist:

There are no new trade setups for today, but we are stalking GLD, FXI, SMH, and SWH for potential entry on a pullback. As always, we will send an intraday e-mail alert if/when we enter any new positions.

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):

unrealized P/L = + $940

DIA long (300 shares from Jan. 9 entry) –
bought 109.89, stop 108.58, target 113.10, unrealized points = (0.12), unrealized P/L = ($36)

Closed positions (since last report):

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

$69,046

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