The Wagner Daily | March 31, 2006

Commentary:

Stocks resumed their former pattern of divergence yesterday, as tech stocks continued to show relative strength, but blue chips drifted lower. The Nasdaq Composite managed to finish its choppy session with a 0.1% gain, but the S&P 500 edged 0.2% lower. Relative weakness was again found in the Dow Jones Industrial Average, which slid 0.6%. The S&P Midcap 400 was unchanged and the small-cap Russell 2000 lost 0.2%. The S&P 500 and Dow Jones Industrials both finished in the bottom third of their intraday ranges, while the Nasdaq closed in the middle of its range.

A 1% decline in the total volume level of the NYSE prevented the index from registering a bearish “distribution day.” Volume in the Nasdaq also dropped off and was 9% lighter than the previous day’s level. Despite Wednesday’s 11% increase in turnover, total volume in the NYSE has been below average levels in each of the past nine sessions. Conversely, the Nasdaq’s breakout to a new five-year high two days ago enabled turnover in that exchange to rise above its 50-day average in each of the past two sessions. Mixed market internals also confirmed yesterday’s price divergence. In the NYSE, declining volume marginally exceeded advancing volume, while the opposite was true in the Nasdaq.

Looking at this week’s leading sectors, you will notice see that the Gold Index ($GOX) has been shining brightly ever since we pointed out the sector’s breakout above its primary downtrend line in the March 24 issue of The Wagner Daily. Within the past five sessions, the $GOX has advanced a whopping 11.7% while most of the broad market has moved sideways. Even more impressive has been the price of spot gold, which suddenly began showing relative strength to the individual stocks. Corresponding to a new 19-year high in the price of spot gold, the StreetTRACKS Gold Trust (GLD) broke out to a new all-time high yesterday:

The Oil Service HOLDR (OIH) has also been rallying steadily higher over the past three days since breaking out of a one-month sideways range from mid-February to mid-March. The ETF is obviously too extended to buy it at current levels, but we would buy a pullback to near support of its 50-day moving average:

On the downside, the Utilities sector has been showing relative weakness by trending lower while the broad market has been sideways to slightly higher. This may present a short-selling opportunity in the Utilities HOLDR (UTH), which closed at a new 4-month low yesterday:

Curiously, the broad-based indices that were showing the most relative strength in the first half of March are now displaying the most relative weakness. In the first half of the month, both the S&P 500 and Dow Jones Industrial Average broke out to new multi-year highs and initially held firm while the Nasdaq lagged behind and continued to trade in a sideways range. But over the past week, we have seen definitive sector rotation out of the S&P and Dow and back into the Nasdaq. Although the Nasdaq finished at a new 5-year high the past two days, both the S&P and Dow are now in danger of falling below pivotal support levels. The Dow closed yesterday below its 20-day moving average for the first time since March 8 and will drop below support of its prior high if it shows any further weakness today:

The S&P 500 has been acting a little better than the Dow this week, but has been having trouble with resistance of its high at the 1,310 level. Looking at the daily chart, notice how the index tried, but failed to break out to a new high yesterday:

Note that today is the last day of the month and the first quarter of the calendar year. As such, don’t be surprised by erratic movement in stocks that is caused by the usual end of quarter jockeying from hedge and mutual funds. Its breakout to a new five-year high causes the Nasdaq to be the safest place to be long right now, while caution is warranted in the blue chips. While Wednesday’s action was positive overall, it appears we still may not be “out of the woods” with regard to moving full speed ahead on the buy side of the broad market.

Today’s Watchlist:

There are no new setups for today, although we are watching UTH (Utilities HOLDR) for a potential short entry, depending on broad market conditions. As always, we will send an intraday e-mail alert if/when we enter it or any other 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):

Closed positions (since last report):

net P/L = ($27)

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

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