Look for further downside in this troubled sector

The major averages experienced some
give back Wednesday as intraday trendline
breaks in the S&P
(
SPX |
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(
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by the close of trade. The Dow got clipped by 45.95 (0.42%), the Nasdaq
Composite
(
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(just a little off the top please, don’t touch the back…) of 6.33 points for a
percentage loss of 0.50%. What started out as a complete tug of war in the
earlier part of the session turned into a field day for sellers later on as
distribution accelerated. At the 11am mark overall volume on the NYSE was
running 17% lower than it was at 11am on Tuesday. On the Nasdaq, the same
figure was off by 6%. Total turnover at the close, however, was only off 1% on
the NYSE and 3% on the Nasdaq clearly showing the increase in selling later in
the session. Take a look at the chart of the Dow below to better understand how
breaks of trendlines make one entire set of traders and investors suddenly
wrong and force them to reverse their positions en masse.

Notice how until the trendline breaks there are obviously a
large number of market participants who think that the market will turn upwards.
They are battling it out with the bears causing the tight range that you see in
the area labeled number 1. Once the trendline breaks, we get the aforementioned
increase in overall volume and the large body candle (2) that signals an
increase in emotion (volume) as new shorts pile in and former bulls realize
immediately that their earlier assessment of direction was wrong and must sell
their holdings.

One of the catalysts for the selling was some extreme relative
weakness in the Homebuilders Sector
(
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the sector hit the presses on Wednesday including a monthly survey from Credit
Suisse First Boston which said in part, “it is difficult to get a definitive
read on a market during the slow winter months . . . prices are climbing in only
select markets and price points, incentives are more prevalent than is
seasonally typical, and demand from investors is abating or shifting to lower
cost areas like Texas. As several markets cool off, it appears that the
ramifications of the speculative euphoria in 2004 and 2005 are starting to
materialize, as inventories have crept up concurrent with slowing home price
appreciation.” This was enough to start the selling and push the sector off
by over 3%. Notice how much of an “outlier” the builders are when listed against
other important sectors which make up large parts of the S&P 500. Its very
obvious that none of them even come close to the 3.3% loss that the builders
experienced yesterday.

Going forward we are looking at the possibility of further
downside in this beleaguered sector. Lennar Corp.
(
LEN |
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Sheet play yesterday morning as a short which is already in the money by
$1.17 from its first entry point. The chart below of the $DJUSHB, showing its
imminent trendline break which should send the sector lower. Remember that
although there is no ETF which groups the builders, a synthetic basket can be
made up on your own of leading names such as
(
RYL |
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(
TOL |
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(
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(
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(
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(
LEN |
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(
CTX |
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(
DHI |
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(
KBH |
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(
TOA |
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loses that trendline either tomorrow or within the next few trading sessions,
the odds would put the next stop for the index at 850 (mid November support) and
then at 800 for a retest of October lows. Prices simply move along the path of
least resistance. When trendlines are broken, prices will naturally pull towards
the next pivot.

As we stated in yesterday’s publication, Gold “continues to
shine” and yesterday was no exception. Check the sector list snapshot above to
see that the $GOX was leading the pack again. Newmont Mining
(
NEM |
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PowerRating) which we
purchased Tuesday via intraday alert to Stalk Sheet subscribers gapped up
fiercely yesterday adding to its gains.

EDITOR’S NOTE: In yesterday’s
Wagner Daily, we incorrectly stated that the Nasdaq experienced a “distribution
day” on December 6. However, because the index closed marginally higher and
volume increased 9%, it was technically a bullish “accumulation day” and NOT a
“distribution day.” Nevertheless, the fact that the Nasdaq closed at its
intraday low and gave back most of its gain on December 6 was bearish and
basically invalidated the “accumulation day.” We apologize for any confusion
caused by this typo.

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