For the third day in a row, a morning rally attempt fizzled out, causing the major indices to trend lower and finish near their intraday lows. The S&P 500 and Dow Jones Industrial Average both showed relative strength and eked out a gain of 0.1%, but weakness in the tech arena continued to weigh on the Nasdaq. Despite the small-cap Russell 2000 Index closing unchanged, the Nasdaq Composite still slid 0.6%. The S&P Midcap 400 lost 0.2%, aiding our new short position in the S&P Midcap SPDR (MDY).
The one bright spot of yesterday’s session is that turnover declined across the board. Total volume in both the NYSE and Nasdaq was 10% lighter than the previous day’s levels. This enabled the Nasdaq to avoid another “distribution day” that signifies institutional selling. Still, many leading stocks continued to fall below their breakout levels and a few even broke major support levels. Market internals were marginally positive in the NYSE, but declining volume exceeded advancing volume in the Nasdaq by a margin of 7 to 2.
One of the biggest challenges facing stocks right now is the major relative weakness in the Semiconductor Index ($SOX). Like the rest of the broad market, the $SOX has been in a steady downtrend since the beginning of May, but the big difference is that the index failed to recover when the major indices bottomed in mid-June. To illustrate this, take a look at the overlay chart below that shows the percentage price change of the S&P 500 versus the $SOX since the June 13 low:
Since the broad market formed its intermediate-term bottom on June 13, the S&P 500 has gained 3.5%, but the Semiconductor Index has fallen 4.3% since then. Notice how the $SOX failed to rally above its prior high along with the S&P at the end of June. That was a major sign of continued relative weakness in the sector, which explains why the $SOX quickly fell to new lows when the S&P pulled back off its highs over the past week. The basic law of relative strength states that sectors and stocks that fail to rally when the broad market does are always the first to fall on any subsequent weakness in the market. The chart above is a great educational example of this.
As you may know, the direction of the $SOX is always important because the sector is so heavily weighted within the Nasdaq. Most of the time, the $SOX acts as a leading indicator for the direction of the Nasdaq, which in turn tends to lead the rest of the broad market. Unfortunately, the longer-term view of the $SOX is equally negative. Looking at the weekly chart, notice how the $SOX just broke below its October 2005 weekly closing low AND its 200-week moving average. Needless to say, this should be a major concern for the bulls:
Although the S&P and Dow are still holding up okay, the Nasdaq is starting to look ugly again and will inevitably begin to weigh on the other indices as well. The Nasdaq rallied 3.7% from June 29 through July 3, but the losses of the past several days have already caused the index to give back all of that gain:
As you can see, the Nasdaq has also fallen back down into its prior trading range from the latter half of July. This equates to a 61.8% Fibonacci retracement from its June 13 low up to the July 3 high. When an index retraces beyond this level, the odds of it significantly reversing back up are greatly diminished, but it could still happen if the Nasdaq doesn’t go any lower within the next several days. Any further weakness in the Nasdaq could result in significant downward momentum that would cause a test of the June 13 low. Obviously, the other major indices would have a difficult time bucking the trend if that happens. Remember that the S&P 500 is holding above its 200-day moving average by only four points.
There are no new setups for today, as we are near the maximum buying power based on the MTG model account. We will continue focusing on managing the three open positions for maximum profitability.
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):
IYR long (400 shares from June 30 entry) –
bought 71.33, stop 72.76, target 74.90, unrealized points = + 1.82, unrealized P/L = + $728
TTH long (700 shares from June 15 entry) –
bought 29.09, stop 29.31, target new high (will trail stop), unrealized points = + 0.41, unrealized P/L = + $287
MDY short (300 shares — 200 from July 7 and 100 from July 10) –
sold short 137.69 (avg.), stop 140.39, target 130.40, unrealized points = + 0.46, unrealized P/L = + $138
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Per intraday e-mail alert, we added 100 shares to the MDY short position. The new average price is reflected above. Stops have also been tightened again on both IYR and TTH positions in order to protect gains.
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Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and