The major indices showed divergence for the second consecutive day last Friday, but this time the spread between the Nasdaq and S&P was even greater. Although the S&P 500 and Dow Jones Industrials were both unchanged, weakness in sectors ranging from Biotechs to Semiconductors caused the Nasdaq Composite to fall 0.8%. The small-cap Russell 2000 lost 0.3% and the S&P Midcap 400 edged 0.2% lower. A modest recovery in the final thirty minutes of trading wiped out the S&P 500’s 0.4% intraday loss and reduced the Nasdaq’s closing loss by the same percentage. Nevertheless, the Nasdaq still closed in the bottom 25% of its intraday range.
Mixed turnover levels confirmed last Friday’s broad price divergence. Total volume in the NYSE declined by 1%, but volume in the Nasdaq was 7% above the previous day’s level. The Nasdaq’s loss on higher volume caused the index to register a bearish “distribution day,” its fourth within the past four weeks. In the NYSE, advancing volume fractionally exceeded declining volume but the ratio was negative by more than 5 to 2 in the Nasdaq.
One reason for the big price divergence in the last session is that Gold and Oil stocks continued to show incredible relative strength, while nearly all the other major sectors closed lower. The AMEX Oil Index ($XOI) spiked 2.8% to close at another record high last Friday, as did the Oil Service Index ($OSX). The CBOE Gold Index ($GOX), which plummeted more than 6.5% the prior day, bounced back sharply with a 3.5% gain. The index is now less than 4% off its all-time high. The StreetTRACKS Gold Trust (GLD), which mirrors the price of spot gold, fared even better by wiping out 4.1% of the prior day’s 4.3% loss. If currently trading the gold stocks and ETFs, we recommend taking a break from doing so until prices stabilize a bit. The volatility in that sector is simply too high right now in order to retain your positions without a high risk of getting whipped out.
One sector that is presenting itself as a possible short-selling opportunity is the Dow Jones U.S. Real Estate Index ($DJUSRE), which is comprised of publicly traded REITs (Real Estate Investment Trusts). The two primary ETFs that mirror the sector are the iShares/DJ Real Estate Index (IYR) and the iShares Cohen and Steers Realty (ICF). Take a look at the daily chart of IYR, which moves in lockstep with the $DJUSRE index:
From its March 17 peak down to its April 17 low, IYR dropped 8.4% off its all-time high. When it closed below its 50-day moving average on April 10, IYR also broke support of its primary uptrend line that had been in place since the low of October 2005. We spotted the weakness in IYR (and ICF) as they were breaking down below their 50-day MAs and uptrend lines, but it is often risk to chase a sector that has already made a substantial move in a particular direction. Instead, we kept it on our radar screen and waited patiently for a bounce into resistance, which is exactly what happened last week. IYR has retraced 50% of the range from its last major selloff, which means it has now run into a key Fibonacci resistance level. It also has rallied into resistance of its prior uptrend line from the October low, which should now act as resistance. Further resistance is provided by the new downtrend line that begins with the March 17 high. Put it all together and we feel odds are good that IYR will soon make another move to the downside and at least retest support of its prior low from April 17. As such, subscribers will note that we are now stalking IYR for a new trade entry on the short side. Trigger, stop, and target prices are listed in “today’s watchlist” below.
As mentioned on numerous occasions throughout the past month, the 1,310 area in the S&P 500 continues to act like a brick wall. Once again, the S&P attempted to confirm a breakout to a new high, but the 1,310 level pulled on the index like the gravitational pull of planet Earth. Although the index has certainly been resilient and is holding up well since the April 18 breakout, the S&P will have a difficult time going higher if the Nasdaq continues to show such relative weakness. The horizontal line on the daily chart below illustrates the 1,310 “line in the sand” resistance level:
Until last Friday’s session, the Nasdaq Composite had a similar chart pattern as the S&P, but the Nasdaq’s 0.8% loss caused the index to give back nearly half of its gain from the April 18 breakout. Resistance of the prior high at 2,375 remains the main obstacle preventing the Nasdaq from going higher:
Although the tone since April 18 has been more bullish overall, the major indices are each having a difficult time rallying above resistance of their prior highs from last month. If they are able to overcome those levels, many individual stocks and ETFs should surge to new highs as well, giving us more opportunities. But for now, we are not seeing a lot of low-risk trade entries. On the long side, most sector ETFs still have too much overhead supply to contend with, but it is too risky to short most sectors at current levels without confirmation that the major indices are going to fail their current breakout attempts. The one exception we have found are the Real Estate stocks and ETFs, which should have a difficult time going much higher even if the broad market does.
IYR – iShares DJ U.S. Real Estate Index
Trigger = below 71.05 (below Friday’s low and 50-MA)
Target = 67.10 (just above February low)
Stop = 72.77 (above Friday’s high)
Shares = 400
Notes = See commentary above for explanation on the setup. Our trigger price is below last Friday’s low, which should confirm the reversal of short-term momentum. It is also back below the 50-day MA if it triggers.
Also, be aware that IYR may be on your broker’s “hard to borrow” list. This means your brokerage firm’s web site may initially tell you that shares are not available for shorting. But if this occurs, we recommend you phone your broker and specifically ask them to locate shares of IYR to borrow for short selling. With a little push, your firm should easily be able to call around and get shares for you within a matter of minutes. If not, consider switching to a different firm who offers a wider selection of stocks and ETFs for shorting (we can offer suggestions). This is just a little advice for those of you who run into this issue.
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):
EWW long (300 shares from April 21 entry) –
bought 39.71 (avg.), stop 36.95, target new high (will trail a stop), unrealized points = (0.15), unrealized P/L = ($45)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
The full position of EWW long triggered last Friday and the new average entry price is shown above.
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