A positive reaction to better than expected jobs data helped stocks snap back from two days of losses last Friday, though lighter turnover in the Nasdaq showed a lack of institutional support. After gapping higher on the open, the major indices initially headed south throughout the first hour of trading, but the bulls subsequently returned to the scene, pushing the broad market above its opening high. The Dow Jones Industrial Average rose 1.2%, the S&P 500 1.3%, and the Nasdaq Composite 1.4%. The small-cap Russell 2000 and S&P Midcap 400 indices logged identical gains of 2.6%, resuming their recent patterns of relative strength. A pullback late the day caused stocks to finish just above the middle of their intraday highs.
Total volume in the NYSE ticked 6% higher, but turnover in the Nasdaq was 7% lighter than the previous day’s level. After two consecutive days of higher volume losses (“distribution”) in the Nasdaq, it would have been much better if the Nasdaq had gained on stronger volume. Instead, mutual funds, hedge funds, and other institutions took a backseat approach to supporting the Nasdaq. The inability of the Nasdaq to score a bullish “accumulation day” was one negative factor of last Friday’s otherwise bullish stock market action. Nevertheless, volume in both exchanges remained above 50-day average levels for the third straight day. The adv/dec volume ratio in the NYSE was positive by nearly 4 to 1. In the Nasdaq, advancing volume beat declining volume by a margin of just under 2 to 1.
CurrencyShares British Pound (FXB) has pulled back to the area of its recent breakout level, which should now act as support. If you missed our original trade entry of July 31, the current retracement in FXB provides a low-risk entry point that is only marginally higher than our original entry price:
Last Friday’s rally enabled both the S&P 500 and Dow Jones Industrials to close at fresh, 10-month highs. The Nasdaq, however, remains in the sideways consolidation pattern that began more than a week ago. Since the S&P and Dow are now showing relative strength within the broad market, it appears the Nasdaq has passed the baton, at least in the short-term. Such action has apparently been the result of institutional sector rotation. Funds have been moving out of healthcare and technology shares, which were formerly leading the market, and back into sectors such as banking and real estate. The end result of this rotation has been a broad market that refuses to correct substantially; rather, funds are continually being moved out of one sector and into another.
In the August 7 issue of The Wagner Daily, we illustrated that many financial ETFs had formed bearish reversal patterns, on sharply higher volume, the previous day. We said this was a “subtle, yet important, warning sign for the short-term trend.” Last Friday, most financial ETFs rallied to close above their previous day’s highs, technically invalidating those bearish reversal patterns, but on lighter volume. Therefore, we’re not “out of the woods” yet. Furthermore, although the prior day’s market action hinted at the possibility of further financial sector weakness on Friday, there was no harm done. We merely suggested the bearish reversal patterns were a warning sign, not a reason to take any specific bearish trade action.
Though it’s positive the stock market has been so incredibly resilient, one potential problem with such a bullish environment is it sometimes breeds complacency. When stocks have a tendency to keep bouncing back after very short-lived corrections by time or price, it sometimes prompts traders to be less disciplined with protective stops because they assume their positions will eventually come back to them again anyway. This may be what’s happening right now. However, we’ve learned from experience that, when traders and investors start to feel so comfortable with a resilient market that they become complacent, trouble is often lurking just around the corner. Is there enough complacency in the market right now to spark a significant correction to the downside? We believe there is, but there simply has not been a fundamental or technical catalyst to spark the correction. Ride the bull while the market remains strong, but don’t fall asleep in the saddle!
Open ETF positions:
Long – DGP, FXB, DBO
Short – (none)
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 (morpheustrading.com), 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.
For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.
