Focus on stocks in these 5 industries

Like the previous day, the broad market gapped up
last Friday morning, but this time stocks held and added to their
gains later in the day. The major indices traded sideways throughout most of the
day, but a rally during the final hour pushed the broad market to new highs into
the close. Both the S&P 500 and Dow Jones Industrial Average
(
DJX |
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PowerRating) gained
0.8%, while the Nasdaq Composite
(
COMP |
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PowerRating) advanced 0.7%. The smallcap Russell
2000
(
RUT |
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PowerRating) showed relative strength and moved 1% higher. Midcaps of the S&P
400
(
MDY |
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PowerRating) lagged behind, as the index gained 0.5%. Each of the major indices
closed within the upper 10% of their intraday ranges, but still showed losses
for the week. The S&P 500 and Dow Jones both shed 0.3% for the week, while the
Nasdaq Composite finished 0.7% lower.

Last Friday saw a huge increase in overall market volume, but it was skewed
by two significant events. Total volume in the NYSE surged 62% higher, while
volume in the Nasdaq was 37% higher than the previous day’s level. The volume
explosion enabled both the NYSE and Nasdaq to register their highest volume
levels in five months. The last time that turnover exceeded Friday’s levels in
both exchanges was on April 15. Obviously, this made Friday a bullish
“accumulation day” across the board, but the volume expansion was largely skewed
by two events. First, it was quarterly “quadruple witching” options expiration,
a day in which options and futures contracts on indexes and stocks
simultaneously expire every three months. This alone typically results in a
significant increase in volume, but Friday also marked a change in the way that
companies of S&P are weighted. In the past, stocks were weighted based on their
market cap, but now shares are weighted based on their float (number of shares
available). This adjustment in the S&P’s calculation further added to the
increase in turnover.

Most industry sectors closed higher last Friday, with a handful of the
sectors we track posting gains of 2% or more. A fresh 17-year high in the price
of spot gold helped the Gold Index
(
GOX |
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PowerRating) to once again steal the show. The
index powered another 4.3% higher, bringing its three-day gain up to a whopping
10.5%! Our long position in
(
GLD |
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PowerRating) (Gold Trust) is working out great, as it
closed at a new all-time high last Friday. We will continue to maximize and
protect gains in GLD by trailing a stop higher as it continues its strong
uptrend. The chart below shows how GLD, which has only been trading since
November of 2004, closed last week at a record high:

Also turning in a strong performance was the Computer Hardware Index
(
HWI |
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PowerRating),
which gained 2.8%. The Banking
(
BKX |
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PowerRating), Disk Drive
(
DDX |
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PowerRating), and Airline
(
XAL |
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PowerRating)
sectors each gained approximately 2% as well. Interestingly, the Semiconductor
Index ($SOX) and Biotech Index ($BTK) both showed relative weakness and gained
only 0.3% each. Until the past week, both of these sectors have been exhibiting
intermediate-term relative strength. The $SOX, however, did bounced perfectly
off support of its 50-day moving average and could attempt a bullish reversal
from here.

On the downside, the Home Construction sector ($DJUSHB) lost 2.9%. Long-term
subscribers know that we have been bearish on this sector since the beginning of
August, when the index fell and stayed below its 50-day MA. The Home
Construction index attempted to rally back above its 50-day MA at the beginning
of last week, but failed and now appears to be headed back down to its August
low. The daily chart of $DJUSHB below illustrates this:

There is not an ETF that specifically tracks the Home Construction stocks,
but the Morpheus Capital fund remains short a basket of three different stocks
in the sector (
(
HOV |
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PowerRating),
(
KBH |
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PowerRating), and
(
WCI |
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PowerRating)).
(
IYR |
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PowerRating), an ETF that
tracks the REIT sector, dropped 0.6% on Friday as well. The Wagner Daily
remains short IYR since our initial entry on September 13. The Retail sector
(
RLX |
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PowerRating) also fell 0.5% on Friday, but all the other sectors we regularly
follow closed higher on the day.

As for the broad market indices, the Nasdaq Composite closed right at its
50-day moving average, the resistance of which is a likely reason why the index
lagged behind the S&P and Dow on Friday. The Nasdaq is now stuck between support
of its 20-day MA and resistance of its 50-day MA overhead, so watch for a big
move in either direction in the coming days. The same can be said of the $SOX
index. Both the S&P and Dow bounced nicely off support of their 50-day MAs last
week, but we can’t be too positive on the upside unless the indices break out to
new highs. The Dow has resistance of the September 12 high just over the 10,700
level. The S&P resistance is from the September high of 1,241 up to the 52-week
high of 1,246. Like we have been preaching for the past two weeks, being
simultaneously positioned in sectors with relative strength (such as Gold) and
short those with relative weakness (Home Construction) is a much better game
plan than attempting to guess whether the broad market will break its prior
highs or fall back below its moving averages.

Open ETF positions:

Long GLD and PPH, short IYR (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.)