Commentary:
Traders sold into the strength of last week’s gains yesterday, causing the broad market to register moderate losses yesterday. After trending lower in the morning, stocks attempted to reverse higher in the early afternoon, but weakness into the close caused the major indices to finish near their intraday lows. The benchmark S&P 500 fell 0.9%, the Nasdaq Composite 0.6%, and the Dow Jones Industrial Average 0.4%. Small and mid-caps showed the most relative weakness. The Russell 2000 and S&P Midcap 400 indices were lower by 1.2% and 1.0% respectively.
Although turnover was light throughout all of last week’s rally, it declined even further yesterday. Total volume in the NYSE decreased by 7%, while volume in the Nasdaq came in 18% below the previous day’s level. With the exception of the holiday-shortened July 3 session, it was the lightest volume day of the year in both exchanges. This was actually positive because lighter volume accompanied yesterday’s losses. With the Labor Day holiday coming up next Monday, one could expect volume to remain lighter than average until at least next week.
One group of ETFs that bucked the stock market’s weakness and rocketed higher yesterday was the Chinese ETFs. Reports that China will begin allowing mainland investors to purchase Hong Kong “H” shares has generated renewed interest in the U.S. market for Chinese ADRs. Of the more than 500 ETFs we monitor daily, the two biggest percentage gainers yesterday were the iShares Xinhua China 25 (FXI) and SPDR S&P China (GXC). Rallying approximately 7% higher, both ETFs gapped to close at fresh all-time highs. Volume also swelled to double average levels. The August 16 reversal day in the broad market also coincided with FXI bouncing off its 200-day moving average. Less than two weeks later, it has ripped to a new high:
Because it’s newer, GXC is not as popular as FXI. Nevertheless, it has followed a similar pattern as FXI since reversing off its low:
Both FXI and GXC will present low-risk buying opportunities if they pullback to near their breakout levels (the horizontal lines on the charts above). With the S&P 500 still in an intermediate-term downtrend, the nice thing about these ETFs is that they are not directly correlated to the direction of the U.S. markets. Nevertheless, caution is still required on the long side of even FXI and GXC. Selling pressure will certainly affect these ETFs if the domestic market starts heading back down towards it prior lows. The PowerShares Golden Dragon (PGJ) is a third ETF comprised of mainland Chinese ADRs, but it has shown relative weakness to both FXI and GXC since the recovery off the lows. It is the only one of the three that did not break out above its prior high from last month. As such, it should be avoided for now.
The iShares 20+ year Treasury Bond Fund (TLT), which we bought on August 24, closed firmly above its prior high and 200-day MA yesterday. Not only are we expecting higher prices in TLT, but a great benefit of buying all the bond ETFs is the high dividends they pay monthly. TLT has been paying a monthly dividend of around 34 cents per share, the next of which will occur the first business day of September. The short and intermediate-term fixed-income ETFs, such as SHY and IEF, also have bullish chart patterns and look good on the long side. Like the international ETFs, investing and trading in the bond ETFs is a good way to reduce your correlation to the direction of the major stock market indexes.
Yesterday, we illustrated how both the S&P 500 and Nasdaq Composite were approaching resistance of their 61.8% Fibonacci retracements and 50-day moving averages. Both indexes failed to even trade above their prior day’s highs, but have already begun to correct from last week’s rally. Going into today, the S&P 500 now has an area of key support just below yesterday’s close. The prior downtrend line that the index broke out above last Friday has converged with the 200-day MA, around the 1,457 level:
It’s important for the S&P to hold support of the convergence shown above. Otherwise, momentum could quickly unwind back to the downside. So far, keep in mind that all we’ve had in the broad market is a short-term uptrend within the context of an intermediate-term downtrend. Since intermediate-term trends always hold wore weighting than short-term trends, it would not be surprising to see a resumption of, or at least an attempt to resume, the primary downtrends over the next week.
Today’s Watchlist:
There are no new setups for today. Instead, we will focus on managing the three open positions.
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):
-
TLT long (300 shares from August 24 entry) – bought 88.02, stop 86.61, target 90.89, unrealized points + 0.29, unrealized P/L + $87
SDS long (250 shares from August 23 entry) – bought 55.85, stop 53.39, target 62.89, unrealized points (0.40), unrealized P/L ($100)
DXD long (250 shares total – half from Aug. 22, half from Aug. 23) – bought 52.07 (avg.), stop 49.69, target 57.90, unrealized points (1.03), unrealized P/L ($258)
Closed positions (since last report):
-
(none)
Current equity exposure ($100,000 max. buying power):
- $53,116
Notes:
No changes to the open positions above.
Edited by Deron Wagner,
MTG Founder and
Head Trader