The Wagner Daily | February 1, 2006

Commentary:

As expected, the Feds hiked interest rates for the fourteenth consecutive quarter, generating the usual post-Fed volatility into the close. After selling off in the first hour of trading, stocks traded sideways ahead of the afternoon results of the FOMC meeting. The broad market initially reacted positively to the 2:15 pm announcement, but the bears took control in the final thirty minutes of the session. The end result was a mixed performance by the major indices, each of which closed relatively near the flat line. The S&P 500 and Dow Jones Industrials lost 0.4% and 0.3% respectively, but the small-cap Russell 2000 gained 0.3% and the mid-cap S&P 400 finished 0.6% higher. Both the Russell and S&P 400 continued to display strong resiliency, as both indices once again closed at new record highs. The Nasdaq Composite rode the fence and was unchanged.

Volume was pretty light throughout the first half of yesterday’s session, but surged higher after the quarter-point rate hike was announced in the afternoon. By day’s end, total volume in the NYSE had risen by 20%, while volume in the Nasdaq was 19% above the previous day’s level. The losses on higher volume technically resulted in a “distribution day” for the S&P, but the broad market’s mixed performance did not point to institutional selling. Furthermore, closing prices of the major indices on a Fed day are often indicative only of a knee-jerk reaction. The real reaction to yesterday’s FOMC meeting is likely to come today, after traders and investors have had a chance to digest the Federal Reserve Board’s commentary.

Although stocks were indecisive and volatile after yesterday afternoon’s Fed announcement, the real volatility occurred in the after-hours market. After the close, Internet giant Google (GOOG) reported quarterly earnings that significantly failed to meet analyst estimates. Because Google has become such a market leader in the Nasdaq, its closely-watched earnings report had a very negative effect on the entire broad market. The Nasdaq 100 Index, which stops trading at 4:00 pm EST, lost only 0.2% yesterday. But QQQQ, the ETF that mirrors the Nasdaq 100, traded as much as 1.8% below the previous day’s close in the after-hours market. Like many of the broad-based ETFs, QQQQ can be electronically traded daily until 6:30 pm EST. The 15-minute intraday chart of QQQQ below shows the sharp after-hours drop that was triggered by Google’s report (brighter colored bars show the after-hours activity):

Needless to say, stocks will be under pressure going into today’s open. However, the good news is that we will finally be able to determine the true underlying health of the market. Stocks’ mixed signals throughout the latter half of January made it challenging to determine which side of the broad market provided the best risk/reward ratio, but the Google news should force the market to “show its hand.” If overall market sentiment is truly bullish, traders will blow off Google’s report and use the opening weakness as a buying opportunity. When the market rallies on bad news, it is a very reliable indicator of an overall bullish environment. Conversely, traders may return to today’s session in selling mode because it is quite bearish when a widely held market leader such as Google misses earnings estimates. Resistance of the January 19 highs on both the S&P and Nasdaq may further provide a convenient excuse for traders to dump shares in today’s session. Looking at the daily charts below, notice how both the S&P 500 and Nasdaq Composite were unable to rally above their prior highs over the past several days:

Regardless of which way the market goes today, be prepared for high volatility. Our conservative, mostly-cash position over the past week may have caused us to miss a bit of the broad market’s recent rally, but our patience is likely to pay off over the next several days. Rather than managing a bunch of broad-based ETFs that could easily make a sharp move in either direction, we now have the luxury of being fully in cash and ready to take advantage of the stock market’s next clear move. As subscribers were alerted in real-time, we sold our long position in PGJ (PowerShares China Fund) into strength for a solid profit yesterday morning. Our ETF portfolio is now 100% in cash, but ready to strike at the next ETF that presents a clear technical picture and positive risk/reward ratio.

Today’s Watchlist:

XLU – S&P Select Utilities SPDR
Short

Trigger = below 32.02 (below daily uptrend line and Jan. 26 low)
Target = 30.15 (just above the Oct. 2005 closing low)
Stop = 32.92 (above hourly downtrend line and 10-day MA)
Shares = 700

Notes = This setup did not trigger yesterday, but we still like it and are stalking for potential entry today. We are looking to short a break of the daily uptrend line on XLU. A “lower high” on the weekly chart helps to confirm the short setup.

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):

Closed positions (since last report):

net P/L = + $610

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

Notes:

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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