Commentary:

Stocks quietly oscillated in a sideways range throughout yesterday’s session before finishing near the flat line and with mixed results. Blue chips showed relative strength again, enabling the Dow Jones Industrial Average to edge 0.2% higher. The S&P 500 was unchanged and the Nasdaq Composite slipped 0.1%. The small-cap Russell 2000 lagged with a loss of 0.9%, as the S&P Midcap 400 dipped 0.2%. A modest bit of strength in the afternoon enabled the major indices to close in the upper half of their intraday ranges. Overall, the session was constructive consolidation that allowed stocks to retain most to all of their previous day’s gains.

Total volume in the NYSE was 13% lighter than the previous day’s level, while volume in the Nasdaq ticked just 1% higher. For every day of the past week, turnover in both exchanges has remained below 50-day average levels, despite the broad market’s rally off the November 2 lows. Given that today is a national holiday (Veteran’s Day), but the markets are still open, trading may remain on the soft side today as well.

Last night, The Kirk Report wrote the following, “Looking over my news and blog feeds this evening, it seems like there are three camps out there: bulls who think this is just a pause that will refresh, bears who think we’re stalling out, and those who are uncertain of either and frustrated as a result. The latter is probably the most popular group from what I see and hear and its completely understandable why this may be. The market is not providing a lot of easy setups at the moment and that alone will tend to irritate the troops.” Frankly, we think that assessment is right on the money.

Of the “three camps,” we’re not afraid to confess we’ve been in the third camp of “those who are uncertain of either and frustrated as a result.” I (Deron) have personally been writing this newsletter every day for the past seven years, and I must say the current environment is one of the most challenging periods for trading and market analysis I’ve experienced during that time. My years of experience, for example, have taught me not to buy a market that bounces every day, on continuously declining volume, after previously undergoing approximately twelve days of higher volume selling in the previous month. Doing so over the past ten years would have surely resulted in getting whacked a vast majority of those times. Yet, here we are with the Dow breaking out to a new 52-week high again, with the S&P and, to a lesser degree, Nasdaq in hot pursuit.

A few subscribers have e-mailed to comment that we’ve missed the recent rally off the November 2 lows. Indeed, it’s true we have not had bullish positions so far this month. However, that same stance of being primarily in “SOH mode” (sitting on hands) prevented us from getting hurt during the market’s substantial decline in the latter half of October. Since mid-October, the model portfolio of The Wagner Daily has closed a total of 12 trades. Of these 12, there were 6 winners and 6 losers, giving us a 50% batting average. But as is typically the case from month-to-month, our average winning trade was about 50% larger than the size of our average losing trade, thereby giving us a net gain of 2.6% on the model portfolio since October 15. During that same period, after a roller coaster ride, the broad-based S&P 500 Index has gained just 0.1% (from the close of October 14 through the close of November 10).

My (hopefully not too winded) point is we’re not concerned about catching every “nook and cranny” move in the market. Rather, we prefer to wait until our numerous, tried and tested technical signals align with one another to give us the green light to get aggressive in either direction, whether long or short. Recently, there simply have been too many mixed signals to feel comfortable jumping in with both hands and feet. If you’re a new trader, feelings of “missing out” on the current rally will probably arise. However, we’ve learned the hard way that the market is very adept at fooling the most people at the least expected time. Put simply, we believe complacency in the market is rather dangerous now. If you feel you must, go ahead and cautiously proceed on the long side of the market, as long as the short-term uptrend remains intact, but reduced share size and tighter than usual stops are highly recommended. As for our model portfolio, we’re nearly flat now, only positioned in the UltraShort 20+ year T-Bond (TBT), which is currently showing an unrealized gain.

Since today’s issue was primarily about market psychology, we’ll conclude with a rather appropriate quote from one of the most influential economists of the 20th century, John Maynard Keynes. As a speculator himself, he once said, “The market can stay irrational longer than you can stay solvent.” Surely, that hits home, given the present environment. Or perhaps his last quoted words are even more appropriate, “I should have drunk more champagne!”

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Today’s Watchlist:

iShares U.S. Real Estate Index Trust (IYR)
Long

Shares = 100
Trigger = 42.81 (above the two-day high)
Stop = 39.89 (below the Nov. 6 low)
Target = n/a (looking for breakout above the Sept. 2009 high — will trail stop thereafter)
Dividend Date = December 2009

Notes = See commentary in the November 10 issue for explanation of the setup. Note that our position size of just 100 shares correlates to a “half position.” Initial risk is just $300. Furthermore, since the market is gapping up today, be sure to wait for the passing of the first five minutes of trading before buying IYR if it triggers on the open. If IYR gaps up, but immediately falls below its trigger price, we’ll hold off on the trade.

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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.

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Notes:

• UUP hit our tightened stop yesterday morning.
• We took a shot at USO on the long side, with small share size, but made a judgment call to scratch the trade when it failed to hold above the breakout level. USO subsequently closed below our exit price, but we’ll continue monitoring its price action today.

• 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.

Edited by Deron Wagner,
MTG Founder and
Head Trader