Commentary:

Stocks followed up Monday’s quiet session with a round of higher volume selling, as mutual funds, hedge funds, and other institutions sold into the market’s recent strength. The major indices got off to a lower start, drifted lower at mid-day, then oscillated in a tight range throughout the afternoon. The S&P 500 lost 2.0%, while both the Nasdaq Composite and Dow Jones Industrial Average fell 1.7%. The small-cap Russell 2000 and S&P Midcap 400 indices declined 3.2% and 2.6% respectively. All the main stock market indexes closed near their intraday lows.

Total volume in the NYSE jumped 19% above the previous day’s level. Nasdaq volume similarly swelled 23%. The stock market’s losses on significantly higher volume caused both the S&P 500 and Nasdaq Composite to register a bearish “distribution day.” Still, it was the first clear instance of institutional selling in more than two weeks. An occasional round of distribution is to be expected, even in the strongest of rallies, but the presence of two or more additional sessions of higher volume selling in the coming weeks would be a warning sign to the bulls. Despite the sizeable losses in the broad market, market internals were actually not that bad. In both the NYSE and Nasdaq, declining volume exceeded advancing volume by just 2 to 1.

In yesterday’s Wagner Daily, we said of the market’s current uptrend, “But one thing we don’t like is that the major indices have been rallying into quarterly earnings season, which kicks into full swing this week. This is potentially negative because optimistic expectations of earnings reports that may be better than expected are now being built into the price of stocks. This means stocks may need to report positive earnings surprises just to maintain their current prices. Otherwise, there’s likely to be post-earnings selling into strength.” This exact scenario, played out by Goldman Sachs (GS) yesterday, was a likely trigger to the sell-off.

Even though Goldman Sachs (GS) more than doubled Wall Street’s quarterly earnings expectations, the stock plunged 11.6% yesterday, dragging down the entire financial sector and broad market as well. Although a decline of nearly 12% may seem pretty bearish, it’s important to keep the overall context of the situation in mind. In just over a one-month period, since its March 9 low, GS rallied a whopping 78%! Therefore, putting yesterday’s decline in perspective, it only equated to a price retracement of just over 25% (from the March low to April high).

After yesterday’s close, Intel (INTC) surprised Wall Street by more than tripling earnings expectations. Yet, guess what happened to its stock price in after-hours trading? It was last trading nearly 5% below Tuesday’s closing price. Again, not surprisingly, Intel had previously trended steadily higher into its earnings report, gaining 28% since its March low. As with Goldman Sachs, the initial reaction to Intel’s better than expected earnings numbers was not encouraging.

Based on early evidence of post-earnings selling into strength, as well as yesterday’s “distribution day,” the broad market could be setting up for a substantial pullback. Without even looking at a chart, it’s fair to say a pullback of one-third to one-half of the major indices’ gains, from their March lows to April highs, would not be shocking. Interestingly, a 38.2% Fibonacci retracement in the S&P 500 presently converges with the 50-day moving average. This is shown on the daily chart below:

If stocks continue selling off in the short-term, look for that 789 area in the S&P 500 to be a key level of price support. If the S&P retraces to that level and doesn’t flash any major signs of distribution in the process, new pullback buying opportunities could be created in ETFs that have been showing the most relative strength on the way up. Of course, there’s also the possibility stocks will correct by time, merely trading in a sideways range for several weeks instead. Either way, the point is to be on guard for further selling in the near-term. The intermediate-term outlook, however, still looks bullish. We’ll be closely watching for ideal pullback entries in strong ETFs in the coming weeks.

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Today’s Watchlist:

There are no new ETF setups in the pre-market.

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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. Please review the Wagner Daily Subscriber Guide for important, automatic rules on trigger and stop prices.

Open positions (coming into today):
TAN long (500 shares from March 31 entry) – bought 7.05, stop 7.47, target 9.75, unrealized points = + 0.91, unrealized P/L = + $455

UGA long (175 shares from March 4 entry) – bought 23.41, stop 23.17, target 31.30, unrealized points = + 1.32, unrealized P/L = + $231

OIH long (100 shares from April 14 entry) – bought 83.85, stop 77.80, target 102.40, unrealized points = + 0.49, unrealized P/L = + $49

USO long (150 shares from March 17 entry) – bought 29.08, stop 28.92, target 38.70, unrealized points = + 0.13, unrealized P/L = + $20

UDN long (700 shares from March 25 entry) – bought 25.70, stop 24.84, target 27.45, unrealized points = (0.26), unrealized P/L = ($182)

SLV long (400 shares from March 5 entry) – bought 13.14, stop 11.71, target 16.35, unrealized points = (0.60), unrealized P/L = ($240)

Closed positions (since last report):

HHH long (200 shares from March 23 entry) – bought 35.25, sold 37.89, points = + 2.64, net P/L = + $524

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

$43,947

Notes:

• Per Intraday Trade Alert, we bought OIH yesterday.
• HHH hit our trailing stop, knocking us out with a decent gain.
• Reminder to subscribers – Intraday Trade Alerts to your e-mail and/or mobile phone are normally only sent to indicate a CHANGE to the pre-market plan that is detailed in each morning’s Wagner Daily. We sometimes send a courtesy alert just to confirm action that was already detailed in the pre-market newsletter, but this is not always the case. If no alert is received to the contrary, one should always assume we’re honoring all stops and trigger prices listed in each morning’s Wagner Daily. But whenever CHANGES to the pre-market stops or trigger prices are necessary, alerts are sent on an AS-NEEDED basis. Just a reminder of the purpose of Intraday Trade Alerts.
• For those of you whose ISPs occasionally deliver your e-mail with a delay, make sure you’re signed up to receive our free text message alerts sent to your mobile phone. This provides a great way to have redundancy on all Intraday Trade Alerts. Send your request to support@morpheustrading.com if not already set up for this value-added feature we provide to subscribers.

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Edited by Deron Wagner,
MTG Founder and
Head Trader