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The Wagner Daily


Commentary:

Stocks gave up early gains for the second day in a row, as overhead resistance of the 50-day moving average held the S&P 500 in check. The S&P 500, up 0.7% at its mid-day peak, slid to a 0.3% loss in the afternoon. Following similar intraday patterns, the Nasdaq Composite and Dow Jones Industrial Average both closed 0.1% lower. The small-cap Russell 2000 lost 0.2% and the S&P Midcap 400 fell 0.3%. Like the previous day, all of the major indices closed in the bottom third of their intraday ranges.

Turnover was nearly on par with the previous day’s levels. Total volume in the Nasdaq increased by 2%, but volume in the NYSE was unchanged. The 0.1% loss in the Nasdaq was technically not substantial enough to label the session another “distribution day,” but the index has still had at least four such days of institutional selling within the past several weeks. The S&P has had five “distribution days” since its early-June peak. In both exchanges, declining volume exceeded advancing volume by margins of approximately 2 to 1. Overall, internals were not overly negative. However, leading stocks began to see selling pressure that was concealed by the modest losses in the major indices.

The S&P 500 has closed below its 50-day moving average in each of the past three sessions. Yesterday, the index attempted to move back above that key level, but reversed lower after being unable to do so. The S&P also tested support of its June closing low at the 1,490 level, but closed two points above it:

The above chart is a good example of the most basic tenet of technical analysis — a prior level of support automatically becomes the new resistance level after the support is broken. The inverse of that statement is true as well. While the 50-day moving average enabled the S&P 500 to bounce higher on three separate occasions this month, the index will now be inclined to sell-off every time it rallies into overhead resistance of its 50-day MA.

If you are new to trading exchange traded funds (ETFs), there are subtle nuances to be aware of. Yesterday’s action clearly contained two of those differences we will explain. The first difference between stocks and ETFs is that most of the broad-based ETFs conclude trading at 4:15 pm ET, fifteen minutes after the close of the regular session, but the same time that the S&P and Nasdaq futures wrap up their regular session. Stocks, of course, register their final closing prices at 4:00 pm ET. Most of the time, this doesn’t make a big difference either way. However, the futures markets sometimes make large moves in that fifteen-minute window. Yesterday was one such occurrence. This is illustrated on the 5-minute intraday chart of the S&P 500 SPDR (SPY) below:

As you can see, SPY moved 72 cents lower between the regular close of 4:00 pm and its “official” closing time of 4:15 pm. This was due to an end-of-day wave of selling in the futures markets that, as you might have guessed, pushed the S&P futures below pivotal support of its June low. Based on yesterday’s bearish close in the futures, the S&P 500 is now positioned to open just below its prior low from June, so be prepared for a volatile open. An abundance of stops just below the June lows are likely to result in whippy trading this morning.

The second subtlety to remember about ETFs is that they have regular dividend distributions, just like stocks. However, depending on the underlying composition of the ETF, their distributions can sometimes be much larger than with individual stocks. Specifically, we are referring to the ProShares family of inversely correlated and leveraged ETFs, each of which made rather large dividend distributions and traded “ex-dividend” yesterday.

Because ETFs are derivatives, they will always trade in lock-step with the daily price action of their underlying components. In the case of broad-based ETFs that track indexes such as the S&P 500, Dow Jones, or Nasdaq, it’s even more of a no-brainer because they move up or down by approximately the same percentage of their corresponding indexes. But occasionally, you might wake up to find a substantial price discrepancy between the index and the ETF. If so, don’t worry. It’s not an error in the computerized algorithm. Rather, the most likely explanation is that your ETF had a dividend distribution on that date. Such was the case yesterday, with our long position in the ProShares UltraShort S&P 500 (SDS).

At yesterday’s open, the inversely correlated SDS was instantly showing a loss of just over 1% from the previous day’s close (about 60 cents per share). Yet, the S&P 500 opened the day only fractionally higher. The reason for the difference was simply that SDS paid out a dividend of 0.43 cents per share yesterday. When stocks and ETFs trade “ex-dividend,” they automatically gap down by the amount of the dividend distribution that day, not factoring in any normal changes in supply or demand. Since the actual dividends subsequently show up as a cash deposit in your trading account, the whole transaction is a wash.

In the case of SDS, the dividend of 0.43 per share will be paid to shareholders on July 2. If you add 43 cents to yesterday’s closing price of SDS, you get the actual price it would have closed at if there had not been a dividend distribution. Whenever an ETF has a distribution, we automatically adjust our original stop and target prices lower by the amount of the dividend payout. The gain from the actual dividend is then included in the recording of the trade’s profit or loss. Including its dividend distribution, SDS is presently showing an unrealized gain of nealry 1.5 points since our entry on June 22.

Despite its small loss, the Dow Jones Industrial Average joined the list of broad-based indexes now trading below their 50-day MAs. Of the five major stock market indexes we monitor daily, the Nasdaq Composite is the only one that remains above its 50-day MA. It has touched it in each of the last two sessions, but closed above it both times. Though the Nasdaq still has more relative strength than the other indexes, it too is beginning to feel the weight of the rest of the broad market.

Today begins a two-day meeting of the Federal Reserve Board, which concludes with an announcement on interest rates and economic policy on Thursday afternoon. Virtually nobody is expecting an increase in the Fed Funds Rate, but economists and traders will be closely monitoring the wording of economic policy going forward. As usual, expect trade to remain light ahead of tomorrow’s announcement.


Today’s Watchlist:

There are no new setups in the pre-market today. We will probably avoid entering new positions ahead of tomorrow’s FOMC announcement on interest rates, but will send an intraday e-mail alert if/when we come across any ideal setups.


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):

      EWO short (450 shares total – 300 shares from June 6, 150 shares from June 20) –

      sold short 40.68 (avg.), stop 40.83, target 37.75, unrealized points = + 1.18, unrealized P/L = + $531

      XME short (150 shares remaining – covered first half on June 26) –

      sold short 63.62 (avg.), stop 61.73, target 58.90, unrealized points = + 2.87, unrealized P/L = + $431

      ** SDS long (250 shares from June 22 entry) –

      bought 52.91 (avg.), stop 51.63, target 56.46, unrealized points = + 1.47 (including dividend), unrealized P/L = + $368

    Closed positions (since last report):

      XME short (covered 150 shares, 150 shares still open — see above) –

      sold short 63.62 (avg.), covered 61.14, points = + 2.48, net P/L = + $369

      SMH long (450 shares from June 21 entry) – bought 38.30 (avg.), sold 37.51, points = (0.79), net P/L = ($365)

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

      $40,375

    Notes:


      Per intraday e-mail alerts, we lowered the stop on XME, then covered half of the short position into weakness as it tested the prior low from June. We also tightened the EWO stop. Despite its very solid breakout last week, SMH failed and dropped all the way down to fill its June 15 gap, stopping us out in the process. Nevertheless, its breakout made it one of the best possible hedges against our short positions, each of which moved deeper into the plus column yesterday.

      ** On June 26, SDS traded “ex-dividend” with a distribution of 0.43 per share, payable on July 2. When ETFs pay dividends during our holding period, we automatically lower the original stop and target prices by the amount of the dividend. The amount of the dividend is also added to our “unrealized points” and “unrealized gains” figures. Even though we normally lower the stop by the amount of the dividend, we actually trailed the SDS stop higher, due to its strong performance yesterday into the close.

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    Edited by Deron Wagner,
    MTG Founder and
    Head Trader

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