Selling short the oil sector ETFs
Continued strength in the tech stocks, especially the
semiconductors, helped the Nasdaq score its fifth consecutive day of
gains yesterday, although the S&P and Dow lagged behind. The Nasdaq Composite
moved modestly higher during the first ninety minutes of trading, then drifted
in a sideways range throughout the rest of the session before finishing with a
0.6% gain. The small-cap Russell 2000 again showed relative strength by closing
0.8% higher, but the S&P Midcap 400 only managed to advance 0.2%. Weakness in
the energy sector weighed on the S&P 500, which was unchanged. The Dow Jones
Industrials eked out a 0.1% gain. Confirming the price divergence, both the S&P
and Dow finished near the middle of their intraday ranges, but the Nasdaq closed
near its high.
Total
volume in the NYSE declined by 6%, but volume in the Nasdaq registered 3% higher
than the previous day’s level. The modest rise in turnover was enough to give
the Nasdaq its third straight “accumulation day” that occurs whenever an index
closes higher and on higher volume. Unfortunately, however, it was also
the Nasdaq’s ninth straight session in which turnover came in below its 50-day
average level. Institutions appear to have been nibbling in the tech arena over
the past several days, but confirmation will occur if stocks hold their gains
when traders begin returning to their desks after the Labor Day holiday this
coming Monday. Trading activity should return to normal by the middle of next
week, so the direction of the market that coincides with the increased turnover
will be critical in determining the overall bias going into the month of
September.
If you
have been buying stocks and ETFs over the past several weeks, the
semiconductors, internets, software, and hardware sectors have clearly been the
place to be. The $SOX has followed through as we anticipated last week, but we
continue to advise tight trailing stops to protect your gains because the rest
of the broad market has not been keeping pace. Sectors ranging from energy to
transportation to financials have each been trending sideways to lower while the
techs have stealthily moved higher. When major industry groups are out of sync
with each other and trading in opposite directions, it usually leads to a lot of
chop and indecision in indices such as the S&P 500. This divergence between the
tech and non-tech sectors means that you are probably better off avoiding new
trade entries in the broad-based ETFs and instead focusing on ETFs that are tied
to specific industry sectors. In our hedge fund, for example, we are currently
long a few semiconductor stocks, but are simultaneously short several oil stocks
and ETFs that have been showing relative weakness to the broad market.
Considering that the Semiconductor Index ($SOX) gained 1.8% and the Amex Oil
Index ($XOI) fell 1.4% yesterday, this blend of positions has been working well.
Our goal is simply to follow the institutional sector rotation that is
constantly occurring in all market conditions. We buy sectors with relative
strength and sell short those with relative weakness to the broad market.
Overlaying charts of the individual sectors with charts of the S&P and Nasdaq is
an efficient and simple way to spot these divergent patterns.
We sold
short the oil sector last week when the $XOI index failed to hold its August 9
breakout attempt. As mentioned in the past, failed breakouts to new 52-week
highs often present great short-selling opportunities with great risk/reward
ratios if your timing is right on the entry. Although we sat through a
week of sideways trading action, the $XOI index began to roll over yesterday.
For the first time since June 26, the $XOI index closed below its 50-day moving
average. The selloff also resulted in a breakdown below support of its two-month
uptrend line. This is illustrated on the daily chart of the $XOI index below:
There
are numerous families of ETFs that track the Oil Index. The S&P Select Energy
SPDR
(
XLE |
Quote |
Chart |
News |
PowerRating) and the PowerShares Dynamic Energy
(
PXE |
Quote |
Chart |
News |
PowerRating) are two of the more
popular ones. Note that the Oil Service HOLDR
(
OIH |
Quote |
Chart |
News |
PowerRating) mirrors the Oil Service
Index ($OSX), which has a very different chart pattern than the Oil Index.
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 .