3 sectors I’m watching now

After beginning the day with an
opening gap up yesterday morning, the major indices trended steadily
before finishing near their intraday lows. Both the S&P 500 and Nasdaq Composite
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0.7%. Small and mid-cap stocks resumed their pattern of relative weakness that
began with the broad market’s selloff last month. The Russell 2000 Index
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gave up 1.7% and the S&P Midcap 400 Index closed 1.6% lower.

The one positive of yesterday’s action is that turnover
declined in both exchanges. Total volume in the NYSE decreased by 24%, while
volume in the Nasdaq was 30% lighter than the previous day’s level. Throughout
the past six weeks, a vast majority of the “down days” have been on higher
volume, but the market bucked that trend yesterday. This could mean that
the bears are taking at least a temporary break from their selling programs, but
there is no reason to start buying stocks and ETFs until we see the lower volume
losses followed up with a session of higher volume gains (aka “accumulation
day”). Despite the market losing on lighter volume yesterday, market internals
were still firmly negative. In the NYSE, declining volume exceeded advancing
volume by a ratio of more than 4 to 1. The Nasdaq was negative by 3 to 1.

Of all the primary industry sectors we follow on a daily
basis, only the Airline Index
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gained 1.0% yesterday, but the airlines are certainly not a sector that is
likely to lead the broad market out of its six-week downtrend. As a group, the
oil-related stocks and ETFs suffered the worst losses yesterday. On June 14, we
wrote that the Oil
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pretty bad, as both sectors fell below support of their 200-day moving averages
and primary uptrend lines on June 13. The broad market’s subsequent rally on
June 15 enabled many of the oil stocks to recover back above their 200-day MAs,
but yesterday’s 3.9% loss in the $OSX and 3.2% decline in the $XOI caused most
of them to give back all of those gains and then some. That sector’s inability
to hold its recent gains confirms the institutional money outflow and relative
weakness we initially noticed in the oil arena. As such, you may consider the
energy stocks and ETFs for potential short entries in the coming week. Looking
at the daily chart of the Oil Service HOLDR (OIH), notice how it promptly gave
back its June 15 gain and closed right at its 200-day moving average.

If OIH falls below its 200-day MA again, there is a good
chance it will break its June 13 low. The other oil-related ETFs have similar
chart patterns as well. A complete list and description of the oil ETFs can be
found by downloading the free
Morpheus ETF
Roundup guide. Curiously, many other industry sector ETFs also rallied back
above their 200-day MAs on June 15, but fell right back down yesterday. The next
several days should be interesting because we could see another major round of
selling if some of heavily-weighted industries fail to hold at their 200-day
MAs.

In the June 12 issue of
The
Wagner Daily, we discussed how the DJ Real Estate Index ($DJUSRE) was one of
the few sectors that was showing relative strength to the broad market’s
weakness. So far, this remains the case, but even the Real Estate ETFs have
begun to drift back down to the lower end of their trading ranges. Notice how
the iShares DJ Real Estate Index (IYR) has been trending lower since it failed
its June 5 breakout:

IYR is still holding up well enough that it could attempt to
break out, but this is not a good environment to be buying breakouts of any
kind. Nearly every strong stock that has broken out over the past several weeks
only remained above its breakout level for a day or two before falling back down
into the range. Based on the thousands of chart patterns we have been studying,
it seems your odds of a breakout actually working are about 1 in 10. Therefore,
it makes more sense to short the sectors with the most relative weakness rather
than fighting the broad market’s primary downtrend and attempting to go long. If
you don’t sell short, we strongly recommend you learn how to do so. At the very
least, consider sitting in cash until there is a valid reason to begin
buying stocks and ETFs again.

Technically, the reversal day from the June 15 rally is still
valid because none of the major indices have violated their lows of that day.
However, both the S&P 500 and Nasdaq Composite have already given back nearly
two-thirds of those gains. Both the small-cap Russell 2000 and S&P Midcap 400
indices did as well. Anything more than a 61.8% Fibonacci retracement tips the
odds in favor of a resumption of the prior trend rather than a trend reversal,
and both the S&P and Nasdaq did that yesterday. Worse is that the S&P was not
even strong enough to test overhead of its 200-day MA, which further solidifies
that level of resistance. The Dow Jones retraced only half of its June 15 gains
yesterday and also held above its 200-day MA, but stocks will have a difficult
time making upward progress without the S&P and Nasdaq in sync with the Dow.
Going into today, we remain in “wait and see” mode. If one of the major indices
closes below its June 15 low, we will look to put on new short positions, but it
is a bit too aggressive to do so until that happens. The fact that yesterday’s
losses occurred on lighter volume is another reason to be alert with short
positions.