Why I’m Selling These 3 Sectors

  • February 7, 2006
  • Deron Wagner

The major indices chopped around in a narrow, sideways range before finishing the day mixed and near unchanged levels. As we have become accustomed to in recent months, small and mid-cap stocks showed the most relative strength in the broad market. Both the Russell 2000 and S&P 400 indices gained 0.5%. But despite strength in small caps, the Nasdaq Composite finished 0.2% lower. The S&P 500 eked out a 0.1% gain and the Dow Jones Industrial Average was flat. Most of the major indices finished near the middle of their intraday ranges, indicating institutional complacency into the close.

Further confirming the idea that institutions were indifferent about yesterday’s action was the broad market’s low volume levels. Total volume in the NYSE declined by 15%, while volume in the Nasdaq was 20% lighter than the previous day’s level. The fourth straight drop in NYSE turnover caused volume to come in below its 50-day average level for the first time this year. Volume in the Nasdaq was lighter than its 50-day average in only one other session this year (January 17). Because the major indices closed near unchanged levels and off of their intraday highs or lows, yesterday’s light turnover does not tell us much. The only thing we can be certain of is that institutions have not been active in the markets over the past several days. Pay close attention to the direction of stocks on the broad market’s next volume spike, as that should clearly indicate the intentions of the institutional traders. This, of course, is important because institutional activity accounts for more than half of the market’s average daily volume. As such, the market is typically led by institutional buying and selling activity as opposed to activity by retail investors and traders.

Although the major indices showed little action yesterday, a
handful of industry sectors made significant moves. The Gold Index
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The Oil Service sector
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(
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Other sectors that made substantial moves yesterday were Semiconductors
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PowerRating), which bounced off its 20-day moving average and gained 2.2%, and the PowerShares
Halter China Index
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PowerRating), which surged 2.8% and closed less than 2% off its record high. As we have discussed on numerous occasions since the beginning of the year, the stocks and ETFs that are tied to mainland China have been on fire!
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PowerRating), the ETF that mirrors the Xinhua China 25 Index, is up 15% this year.
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PowerRating), technically a closed-end investment fund, but diversified like an ETF, is showing a whopping 32% year-to-date gain. The chart below illustrates the year-to-date percentage gains of these three funds:

The great thing about international ETFs such as FXI is that foreign markets often trade independently of the U.S. markets. A good example of this is that FXI is up 15% this year, while both
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PowerRating) are up only 1%. If you have an IRA account in which you are not able to sell short, international ETFs may provide you with alternative long-term investment options in times when the U.S. markets are chopping sideways or trending lower. The iShares family of ETFs has the largest selection of international ETFs, which can be viewed on the iShares web site.

As for the broad market, the technical picture has not really changed since yesterday’s analysis. 1,261 remains key support of the prior low on the S&P 500. A break below that should generate substantial downward momentum. Upside resistance is in the range of 1,269 (50-day MA) all the way up to 1,277 (20-day MA). For the Nasdaq Composite, 2,247 is a pivotal support level, while resistance is from 2,266 up to 2,291. Overall, we remain moderately biased to the short side in the short-term — except, of course, for the Chinese stocks and ETFs.

Open ETF positions:

Short
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PowerRating),
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PowerRating), and
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PowerRating) (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)

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 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 or to learn about Deron’s other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com .