Watch the Banking Index, here’s why
After beginning the day with a modest rally out of the starting gate, stocks drifted in a narrow, sideways range throughout most of the session, but a rapid selloff in the final forty-five minutes of the session registered losses in the broad market. The Nasdaq Composite again showed the most relative weakness and finished 0.8% lower. The S&P 500 fell 0.4%, while the Dow Jones Industrial Average lost only 0.2%. Mid-cap stocks held up pretty well, enabling the S&P Midcap 400 Index to post a 0.2% gain, but the small-cap Russell 2000 slid 0.5%. Each of the major indices finished near the bottom of their intraday ranges, pointing to institutional selling throughout the “professional hour” (the final hour of each trading day).
Despite yesterday’s losses, volume declined in both exchanges. Total volume in the NYSE was 3% lighter, while volume in the Nasdaq was 17% lower than the previous day’s level. Turnover did, however, increase a bit during the final hour of the session. Volume also came in above 50-day average levels in both exchanges. From March 20 through April 17, volume in the NYSE was so light that it exceeded its average level in only one of those twenty days. But since then, volume has exceeded its average level in nine of the past ten days. Comparing this pattern with the price action in the broad market, we see that volume has been at its highest level while the S&P has been consolidating near its highs over the past several weeks. When volume levels are increasing, but prices are not increasing along with the higher turnover, this is bearish action referred to as “churning” and indicates institutional selling into strength. Conversely, increasing volume levels would be very positive if the market was moving higher as well, but that has not been the case. Often, this “churning” near resistance of a prior high precedes a breakdown in the broad market. As we pointed out last week, several of the broad-based ETFs registered record high volume levels on April 27, but without a significant gain in prices. We still believe that day was significant, as professional traders are aware that volume is one of the few technical indicators that never lies.
One interesting pattern of sector rotation we have seen over the past several
days has been the divergence between the Banking Index
(
BKX |
Quote |
Chart |
News |
PowerRating) and the
Broker-Dealer Index
(
XBD |
Quote |
Chart |
News |
PowerRating). As we have discussed over the past several days, the banking stocks and ETFs, such as
(
RKH |
Quote |
Chart |
News |
PowerRating), have been acting great since breaking out to a new all-time high on
April 27. However, the XBD index, which is comprised of securities
broker-dealers such as Goldman Sachs, Merrill Lynch, and Charles Schwab,
completely ignored the BKX breakout on April 27. On April 28, the Broker-Dealer Index fell 2.1% as the Banking Index gained
another 1.9%. The downward momentum in the XBD really began picking up steam
yesterday, as the index lost another 3.2%. More importantly, it closed below
support of its 50-day moving average for the first time since October 18, 2005.
As the daily chart below illustrates, the XBD had been in a steady uptrend for the past six months, but the index broke support of that uptrend yesterday:
What we have seen over the past few days is a normal pattern of institutional money flowing out of an “overbought” sector and into one that has lagged behind. As trend traders, our job is to constantly look for where the “big money” is flowing and simply trade in the same direction. Thanks to the advent of exchange traded funds, sector trading is usually quite simple because one only needs to purchase one security in order to have diversified exposure to a whole sector. As you know, the Regional Bank HOLDR (RKH)
is probably the best bet for capturing anticipated gains in the Banking Index.
The S&P Select Financial SPDR
(
XLF |
Quote |
Chart |
News |
PowerRating) is another viable choice, but it has
lagged the Regional Bank HOLDR since the breakout. Unfortunately for those of
you who wish to sell short the Broker-Dealer Index at the same time, there is
not yet an ETF that specifically tracks the XBD. However, you may wish to make
your own “synthetic ETF” by simultaneously trading a small basket of individual
stocks that comprise the index. You can view the twelve underlying stocks that
make up the XBD index by clicking here.
Taking an updated look at the major indices, the most notable thing that happened yesterday was the Nasdaq Composite’s close below its 50-day moving average:
As the chart above illustrates, it was the Nasdaq’s first
close below its 50-day MA since March 13. Nevertheless, it did manage to find
support at its prior low from April 17, just below the 2,300 level. Going into
today, keep a close eye on how the Nasdaq acts near that prior low. It could
easily hold support and bounce back above the 50-MA from here, which would not
be surprising considering how long the index has been in a trading range. On the
other hand, a drop below the prior low could send the Nasdaq quickly down to its
200-day moving average, which is just below the low of March. As for the S&P
500, it’s the same old story — the 1,310 area remains a brick wall of
resistance. Until the market proves otherwise, we must assume the erratic,
range-bound chop goes on.
Open ETF positions:
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.)
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.