The broad market wrapped up the week with a second straight day of laudable gains last Friday, enabling the Nasdaq to fully recover its January 20 loss. Both the Nasdaq Composite and Dow Jones Industrials advanced 0.9%, while the S&P 500 gained 0.8%. Small and mid-cap stocks lagged a bit, but the Russell 2000 and S&P 400 indices each still tacked on another 0.5% and finished the week at new record highs. It was a choppy and erratic week that was challenging for most traders, but the Nasdaq nevertheless advanced 2.5%. Gains in the small-cap Russell 2000 were even more impressive, as the index surged 3.9% higher. Both the mid-cap S&P 400 and Dow Jones Industrials gained 2.2%, while the S&P 500 rallied 1.8%.
Total volume in the NYSE declined by 1% last Friday, while volume in the Nasdaq was 4% lighter than the previous day’s level. The drop in turnover prevented the S&P and Nasdaq from registering another “accumulation day,” but turnover still came in well above average levels on both exchanges. Market internals were positive, but not by a wide margin. Advancing volume led declining volume by only 1.8 to 1 in the NYSE and 1.7 to 1 in the Nasdaq. On a day of strong gains, advancing volume should at least double declining volume in order to confirm the bullish market action.
Since the beginning of January, Chinese stocks and ETFs have shown great relative strength to the U.S. markets. On the “down” days in the S&P and Nasdaq, the Chinese sector was mostly sideways, then rallied immediately on any bounce in the U.S. markets. We had previously pointed out the relative strength in FXI (iShares Xinhua China 25 Index) several times this month. Looking at its daily chart, notice how the index never fell below its 10-day moving average when the S&P and Nasdaq dropped sharply on January 20. After several subsequent days of consolidation near the high, FXI blasted off to close at a fresh all-time high last Friday. The move was confirmed by volume that was more than 3 times its 50-day average level:
PGJ (PowerShares China Fund), which we have been long since January 19, has also been showing similar relative strength and broke out to a new high on Friday. The prior base of consolidation should now act as the new support level, so we will be raising our trailing stop to maximize profit and protect gains along the way. This is illustrated on the chart below:
CHN (China Fund) is technically not an ETF, but is a closed-end investment fund that trades like a stock. Unlike FXI and PGJ, CHN is well below its highs, but is basing out nicely on its weekly chart and appears poised for another leg higher in the intermediate-term. FXI, PGJ, and CHN are all likely to continue trending higher in the intermediate and long-term, although short-term corrections along the way are inevitable.
If you only look at the broad market’s absolute performance this month, the actual percentage gains are impressive. But the reality is that it was a challenging month for short-term traders. The start of quarterly earnings season caused many strong sectors and stocks to show weakness, while those that were showing relative weakness began to reverse and show strength. Furthermore, strong price divergence between the small and large-cap stocks created indecisive action that made it challenging to stay with winning positions for more than a few days, lest they reverted to break-even or losing trades.
Looking forward, one way to prevent yourself from getting “chopped up” is to focus on trading international ETFs that have been trading independently of the U.S. markets. The iShares family of ETFs has a wide selection of international ETFs that you may want to check out. The complete list is available on the iShares web site. Even better, you may want to remain largely positioned in cash until some of these mixed signals and market divergence begins to fade.
There are no new ETF setups for today.
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):
PGJ long (1000 shares from Jan. 19 entry) –
bought 15.30, stop 15.19, target new highs (will trail stop), unrealized points = + 0.37, unrealized P/L = + $370
Closed positions (since last report):
RTH short (400 shares from Jan. 23 entry) –
shorted 94.76, covered 96.28, points = (1.52), net P/L = ($616)
Current equity exposure ($100,000 max. buying power):
We stopped out of RTH, as PGJ broke out to a new high (note the new stop above).
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Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and