If you are long these 2 sectors, be careful

The broad market traded in a
benign, sideways range throughout the first
half of yesterday, but the bears promptly took control in the latter half of
the session. After trending steadily lower throughout the afternoon, each of
the major indices finished "in the red" and at their worst levels of the day.
Losses were moderate in the S&P 500
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SPX |
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which closed lower by 0.6% and 0.4% respectively, but losses were much worse
in the tech and small-cap arenas. The small-cap Russell 2000 Index
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which we highlighted as a potential short candidate yesterday morning, dropped
1.6% and continued to show the most relative weakness. As such, our new short
position in IWM is already looking pretty good. The Nasdaq Composite
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COMP |
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performed equally poorly, as the index lost 1.3% yesterday. The mid-cap S&P
400 Index fell 1.1%.

The one positive of yesterday’s session is that turnover
levels receded in both exchanges. Total volume in the NYSE declined by 21%,
while volume in the Nasdaq was 29% lower than the previous day’s level. The
drop in broad market volume prevented the formation of another "distribution
day," which is positive, but remember that last Friday’s high volume was also
skewed by quarterly "quadruple witching" options expiration day. Market
internals were also bearish yesterday. In the Nasdaq, declining volume
exceeded advancing volume by a margin of 4 to 1, while the ratio was negative
by approximately 5 to 2 in the NYSE. Institutional selling may not have been
in full effect, but there certainly was a lack of buying interest to prop
things up. Yesterday’s negative market performance was simply the outcome of
the recent and numerous "distribution days" we have been warning subscribers
about.

Many industry sectors turned in sharp losses yesterday,
while only one stood out on the upside. Positive news for pharmaceutical giant
Pfizer enabled the drug sector
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DRG |
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Obviously, we were quite pleased with the action because we were long PPH
(Pharmaceutical HOLDR) going into yesterday. As you may recall, we bought PPH
on December 14 when it broke out above technical resistance. As of now, the
open position is showing a marked-to-market gain of nearly 3 points. However,
regular subscribers should note the new trailing stop price in the Daily
Performance Report below.

Aside from the healthcare-related sectors, all the other
industries we follow closed with losses yesterday. The Home Construction
sector ($DJUSHB) fell 2.2% and was one of three major industry sectors that
shed more than 2%. The other two sectors were Semiconductor ($SOX) and Biotech

(
BTK |
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PowerRating), hit with losses of 2.3% and 2.1% respectively.

In the December 16 issue of The Wagner Daily, we
mentioned that both the $SOX and $BTK sectors were holding in bullish
consolidation patterns and were likely to lead the Nasdaq higher if
their consolidation patterns led to upside breakouts. However, both sectors
have since fallen below support of their channels of consolidation and are no
longer looking so hot on their daily charts. The $SOX is now trading well
below prior support of its daily uptrend line from the October low and has
also fallen below its 20-day moving average. Worse is that the $SOX has fallen
below support of its consolidation that began when the index bounced off
support of its uptrend line on December 9. In a healthy market, the $SOX
consolidation of the past week should have led to new highs and a resumption
of the primary uptrend. Instead, it went the opposite direction:

The $BTK index looks equally negative on its daily chart, as
the index closed below support of a five-week sideways consolidation
yesterday. Like the $SOX, it has also broken below support of its prior
uptrend line, which will now act as resistance on any rally attempt:

Needless to say, traders who are long BBH or SMH should be
very careful here and might consider selling into strength on any bounce. If
the weakness in these two sectors continues, it will undoubtedly drag down the
Nasdaq as well. We have noticed that more and more sectors are beginning to
set up for entries on the short side, but we are not aggressively looking to
enter new positions because it is a holiday week. For now, we are comfortable
with being short IWM and long PPH. Being short a sector with relative weakness
and long a sector with relative strength is a great way to minimize your risk
in a market that is showing mixed signals.

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