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!”

Open ETF positions:

Long – (none)
Short – TBT (an inversely correlated “short ETF” we’re long)

NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or mobile phone text message on as-needed basis.

Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (, which he launched in 2001. Wagner’s new book, Trading ETFs: Gaining An Edge With Technical Analysis, was published by Bloomberg Press in August, 2008. Wagner also appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world.

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