This sector is springing to life

Stocks followed up Thursday’s strong
rally with another session of higher volume
gains last Friday. The major indices showed weakness in the morning session, but
the bulls provided support in the afternoon and enabled the broad market to
close modestly higher. The S&P 500
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each gained 0.4%, while the Nasdaq Composite
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small cap Russell 2000
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0.7%, but the S&P Midcap 400
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indices finished in the upper third of their intraday ranges, which also means
that most stocks closed last Friday near their best levels of the week. The
Nasdaq Composite and S&P 500 both rose 1.1% for the week, as the Nasdaq locked
in its fifth consecutive week of gains. The Dow Jones Industrials gained 0.7%
for the week.

Total volume in the NYSE increased by 7% last Friday, while
volume in the Nasdaq was 9% higher than the previous day’s level. This means
that both the S&P and Nasdaq registered their second consecutive "accumulation
days," indicating institutional demand is alive and well. Note, however, that
part of the volume increase was likely due to the fact that Friday was monthly
options expiration day. As of mid-day, it appeared that the broad market was
conversely headed for a bearish "distribution day" because volume was running
higher and most of the indices were trading lower. But Friday’s afternoon rally
reversed that scenario. Market internals were bullish, as advancing volume
exceeded declining volume by approximately 2 to 1 in the NYSE and slightly less
in the Nasdaq.

The Semiconductor Index
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relative weakness throughout this month’s rally, sprung to life on Friday and
ripped 2.5% higher. This was largely fueled by the 13% gain in semi chip maker
Marvell Technology Group
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we felt that weakness in the sector was the one element that could prove to be
troubling for the Nasdaq. But based on Friday’s action, it appears the $SOX is
now going to play "catch up" to the relative strength we have seen in the
Biotech and Internet sectors. As the chart below illustrates, Friday’s gap put
the index above its prior closing high from October 3. The $SOX is now less than
2% below its prior 52-week of 486, so we will probably see a new high in the
index this week:

Although the $SOX is starting to look much better,
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(Semiconductor HOLDR) is still trading below its primary downtrend line that has
been in place since the high of August 2. This can be attributed to the fact
that only 20 stocks comprise SMH, with MRVL not being one of them. Because $SOX
and SMH are currently NOT trading in sync with each other, be sure to analyze
each charts independently, rather than blindly buying SMH just because the $SOX
breaks out to a fresh high. Notice how the downtrend is still intact in SMH:

In the November 18 issue of The Wagner Daily, we noted
that the Nasdaq Composite had closed at a new 4-year high, but the S&P 500 was
still trading below its prior high from August 3. However, Friday’s 0.4% gain
enabled the index to close at a fresh 4-year high as well! The daily chart of
the S&P below illustrates how the index closed above resistance of its prior
high of 1,245. That prior horizontal resistance level should now act as the new
support on any pullback today:

The action in the S&P Midcap 400 Index (and MDY) is even more
impressive because it is once again trading at a record high with no prior
resistance levels:

Our overall intermediate-term bias remains on the long side of
the market because several of the major indices are trading at new highs and
have no overhead supply to deal with. However, given that the Nasdaq has had
five straight weeks of gains, we would not be surprised to see a short-term
correction from current levels. If this happens, we would view the correction as
a buying opportunity in the sectors that have been showing the most relative
strength (gold, biotech, internet, financials, and now semiconductors). If
you’re currently long, be sure to trail stops in order to protect your gains in
the event of a correction. As for the short side, we see no low-risk
opportunities for swing traders because the broad market is no longer in a
downtrend. Although we could drop for a few days, fighting the overall trend
always presents a negative risk/reward ratio. You will probably have better odds
of success by waiting for any correction to subside and then buying the market
instead.

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