The Wagner Daily | May 19, 2006

Commentary:

The broad market began with an opening gap up that led to sideways range throughout most of yesterday’s session, but the bears arrived on the scene in the final hour, causing the major indices to sustain yet another day of substantial losses. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each lost 0.7%, while the S&P Midcap 400 slid 0.9%. The small-cap Russell 2000 again showed the most relative weakness by closing 1% lower, thereby causing our short position in the iShares Russell 2000 (IWM) to finish with a marked-to-market gain of 3%. For the first time in nearly twelve years, the Nasdaq suffered its eighth consecutive day of losses. Investors Business Daily reports that the Nasdaq has only had six losing streaks longer than its current eight-day string of losses since 1974. The Nasdaq also closed below support of its 2006 low that we illustrated in yesterday’s Wagner Daily and is now down 1.1% for the year.

Although it may not be very comforting to the bulls, one positive is that yesterday’s losses occurred on lower volume. Total volume in the both the NYSE and Nasdaq exchanges was 13% lower than their respective levels of the previous day. After the numerous “distribution days” that have contributed to the broad market’s recent collapse, a session of lighter volume losses may indicate that institutions are taking a break from the heavy sell programs, at least in the short-term. Nevertheless, there have yet to be any signals that the market is ready to bounce, especially since the Nasdaq blew right through its 200-day moving average on May 17. An upside retracement will eventually come, but trying to pick a bottom in such a weak environment could become a very expensive proposition.

Because there has been such a strong trend in the broad market over the past week, most of our recent commentary and analysis has been focused the major indices instead of specific industry sectors. With practically every sector succumbing to the selling pressure, we felt it was more important to analyze key support levels of the major indices rather than chart patterns within individual sectors that have been following the overall market anyway. But since stocks will eventually bounce, it is a good idea to know which sectors have been showing the most relative strength to the broad market over the past week. Those stocks and ETFs that did not fall when the market did will likely be the first to surge higher when the market retraces some of its recent losses.

To find out which sectors have been holding up the best, we scanned for all the ETFs that were showing an overall gain from the close of May 10 (before the selloff began) through yesterday’s close. Out of the 247 ETFs we searched, only 8 of them were trading higher throughout this time period. The top gainer, weighing in with a whopping 1.5% advance, was the iShares Health Care Index (IHF). Most of the ETFs that were only negative by a small margin were also related to health care. Another one of the eight advancers of the past week was the Euro Currency Trust (FXE), which mirrors the price of the Euro versus the U.S. dollar. The remaining six ETFs were all within the same sector. Care to guess which one? The other gainers were all part of the iShares family of fixed-income (bond) ETFs. Not only did this group of ETFs buck the trend of the equities markets, but a few of them are also showing signs of bottoming from their lengthy downtrends. Take a look at the iShares Corporate Bond Fund (LQD), for example, which broke out above horizontal price resistance yesterday after forming a double bottom the previous day:

The low volatility of the fixed-income ETFs makes them a bit too slow for active short-term trading, but they provide a great parking place for any long-term retirement funds such as IRAs in which you are prohibited from selling short. If you are concerned about the recent weakness in the broad market and are looking for a place to diversify some of your long-term funds, you may want to consider the fixed-income ETFs, especially since many of them appear poised to break out above their downtrend lines. The six iShares fixed-income ETFs and their ticker symbols are listed on the “Specialty ETFs” tab of our ETF Roundup reference guide.

Today’s Watchlist:

There are no new setups for today, as we feel the selling is a bit overdone in the short-term and we need to wait for a correction in the market before initiating new short positions. On the long side, all the potential setups we see (and there aren’t many) require a very short time horizon in order to have a positive risk/reward ratio. As with IWM a few days ago, we will send an intraday e-mail alert if any of the ETFs we are stalking for entry trade through their trigger prices 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):

unrealized P/L = + $660

Closed positions (since last report):

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

$21,381

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