The Wagner Daily | December 12, 2006

Commentary:

Much like the previous day’s session, stocks rallied in the morning, then meandered in a sideways to lower range throughout the remainder of the day. The S&P 500, Nasdaq Composite, and the Dow Jones Industrial Average each finished 0.2% higher. Small and mid-cap stocks, often a leading indicator to the broad market’s direction, both lagged behind. The Russell 2000 Index gained 0.1%, but the S&P Midcap 400 lost 0.1%. Each of the major indices again closed near the middle of their trading ranges, confirming a lack of commitment by institutional traders ahead of today’s Fed meeting on interest rates. As expected, it was a rather uneventful day on a technical level.

Turnover was mixed yesterday, but still light overall. Total volume in the NYSE declined by 4%, while volume in the Nasdaq was 2% higher than the previous day’s level. Despite the uptick, Nasdaq volume remained below its 50-day average level. In the NYSE, volume fell to its lightest regular session level since October 9. Market internals were bullish by only a narrow margin. Advancing volume in the NYSE exceeded declining volume by a ratio of 1.2 to 1. The Nasdaq was positive by only 1.4 to 1. We should hopefully see a gradual increase in the number of shares changing hands after today’s FOMC meeting.

Taking an updated look at a couple of the major broad-based ETFs, you will see that the Nasdaq 100 Tracking Stock (QQQQ) is clinging to support of the lower channel of its uptrend. QQQQ has probed below that trendline support in each of the past three sessions, but closed yesterday barely above it:

By forming a “lower high,” QQQQ is in the process of rolling over, but a trend reversal won’t be confirmed unless a subsequent “lower low” is also marked. In order for that to occur, QQQQ must close below its December 1 low of 43.26 (1,760 in the Nasdaq 100 Index). We remain short the Nasdaq 100 from our December 7 entry. Rather than selling short QQQQ, we simply bought the UltraShort QQQQ ProShares (QID), which is inversely correlated to the Nasdaq 100, and at a 2 to 1 ratio. If QQQQ confirms the break of its lower trend channel, QID will correspondingly break out above upper channel resistance of its downtrend.

The S&P 500 SPDR (SPY) is in a healthier position than QQQQ because it is in the middle of its uptrending channel:

Obviously, new long positions have a higher chance of success if they are S&P/Dow type sectors as opposed to the Nasdaq. Going into the start of this month, most financial sectors were looking pretty weak, but some big merger and acquisition activity in the banking sector on December 4 caused an unexpected upward surge. Both the Banking Index ($BKX) and Securities Broker-Dealer Index ($XBD) have since snapped back from bearish chart patterns into what has now become bullish patterns. Not surprisingly, we stopped out of our short position in the Regional Bank HOLDR (RKH), which we entered before the sector’s M&A news on December 4. But considering that the $BKX index closed yesterday at a fresh record high, we certainly don’t want to be short. Looking at the chart below, notice how the $BKX has rallied back with a vengeance since December 1:

In addition to newfound strength in financials, don’t forget that the DJ Utilities Average ($DJU) also look pretty good. After a modest three-day correction from its all-time high, the $DJU snapped back yesterday. Barring any major shock from the Feds, the Utilities ETFs such as the Utilities HOLDR (UTH) should continue their uptrends.

It’s positive for the S&P that the financials have rallied back to their highs, but the problem is that tech remains weak. The Semiconductor Index ($SOX) is in “no man’s land,” which certainly does not bode well for the Nasdaq. The S&P and Dow could easily break out to new highs from here, but the indices probably would not get very far without the Nasdaq leading the way. A mostly cash position still is not a bad idea, but you may want to position yourself on both sides of the market if you are heavily invested in the market right now. If the Nasdaq pulls the S&P below its uptrend line, you can quickly cut your long positions. Conversely, if the S&P pulls the Nasdaq back to its high, you can cover your shorts with minimal damage. Given the anticipated post-Fed volatility from today’s meeting on interest rates, this is one way to reduce your overall risk until the market makes up its mind.

Today’s Watchlist:

There are a couple of ETFs we are stalking for potential entry, but we first want to see the reaction to today’s FOMC meeting before initiating new positions. As always, we will promptly send an intraday e-mail alert if/when we enter any new trades.

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 = ($102)

USO long (300 shares from Dec. 5 entry) –
bought 54.60, stop 52.34, target 58.90, unrealized points = (1.60), unrealized P/L = ($480)

Closed positions (since last report):

net P/L = ($544)

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

$34,289

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