Monday’s relief rally offered a glimmer of hope for the stock market, but the enthusiasm quickly faded, enabling the bears to firmly resume control yesterday. Although short-term bullish momentum enabled the broad market to climb higher yesterday morning, traders promptly sold into strength in the afternoon. By day’s end, all of the major indices had erased their previous day’s gains and then some. The Nasdaq Composite swooned 1.4%, the S&P 500 1.3%, and the Dow Jones Industrial Average 1.1%. The small-cap Russell 2000 lost 1.0%, as the S&P Midcap 400 fell 1.2%. Each of the broad-based market indexes closed at its intraday low.
Turnover picked up yesterday, causing both the S&P 500 and Nasdaq to register a bearish “distribution day.” Institutional selling caused total volume in the NYSE to increase 8%, while volume in the Nasdaq ticked 17% above the previous day’s level. With lower volume matching Monday’s gains, it was not surprising that trading levels rose yesterday. In weak markets, the lack of institutional buying results in lighter turnover on most of the “up” days. As institutions subsequently sell into strength of market bounces, volume often increases. Remember that more than half of the market’s average daily volume is the direct result of trading by mutual funds, hedge funds, pension funds, and the like. Paying attention to daily changes in volume levels is a great way to know what is really happening “under the hood” of the market. Since the correction began more than two weeks ago, the stock market’s volume patterns have not yet shown any clear signs of substantial buying interest.
In yesterday’s commentary, we outlined several of the technical reasons we felt that follow-through Monday’s rally would be short-lived, rather than representing a significant bottom. The fact that both the Nasdaq and Dow formed new near-term lows yesterday supports that analysis. The S&P 500 managed to barely finish above Monday’s intraday low and now sits just six points above weighty support of its 200-day moving average. Based on the large pre-market gap down in the S&P futures, expect the index to test that pivotal level today:
Regarding moving averages, the 20-day MA is generally considered to be a useful indicator of short-term trends, while the 50-day MA basically indicates the intermediate-term trends of stocks or indexes. The mighty 200-day MA, as one might surmise, is a crucial indicator of long-term trends. Such is its importance that a stock or index will almost always bounce off support of the 200-day MA on the initial test. This occurs because many institutions use a pullback to the 200-day MA as a gauge for initiating new long-term positions. But if an index blows right through it without a pause, as the Russell 2000 recently did, that’s pretty bearish.
The last time the S&P 500 corrected touched its 200-day MA when correcting from above was back in May of 2006. Running stop orders, the index first dipped below its 200-day MA on an intraday basis, but triggered a bounce that enabled the S&P to retrace 50% of its loss just one week later. The index subsequently stalled and dropped back below its 200-day MA, then moved back above its several months later. Below is a snapshot of the S&P 500 from this period last year:
Though it’s too early to speculate how stocks will react when the S&P 500 tests its 200-day MA, high volatility and whippy action is one thing that should be expected. For that reason, we continue to lay low, at least until we see how investors and traders react to the forthcoming test of the 200-day MA. Several ETFs remain on our watchlist for selling short into a bounce, while fewer ETFs populate our long watchlist right now. Frankly, it doesn’t really matter to us which way the S&P goes from here. We’re prepared either way, but are also being patient and disciplined. Because they lock in profits during the good periods, professional traders are often out of the markets more than they are in. Right now is one of those periods when being positioned fully in cash is surely is one of the best positions around! As always, we will be trading what we see, not what we think!
There are no new setups in the pre-market today. We expect high volatility on the S&P 500’s test of its 200-day MA today, but we’ll be ready with new trade setups after we see the initial reaction.
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):
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
We are currently flat.
Edited by Deron Wagner,
MTG Founder and