Momentum from Monday afternoon's weakness spilled over into Tuesday's
session, causing stocks to take a step back yesterday. The S&P 500 and Dow
Jones Industrial Average surrendered their previous day's gains, and then some,
causing both indexes to register identical losses of 1.2%. Relative strength in
biotech and semiconductors helped the Nasdaq Composite to hold up much better.
The tech-heavy index gave back just 0.4%. The small-cap Russell 2000 and S&P
Midcap 400 indices declined 0.8% and 1.0% respectively. Each of the main stock
market indexes closed in the bottom third of its intraday range.
Total volume in the NYSE came in 11% lighter than the previous day's level,
while volume in the Nasdaq declined 9%. The lighter volume losses technically
means the S&P 500 and Nasdaq Composite did not mark a bearish "distribution
day." However, recall our discussion from yesterday, where we said that Monday's
increasing volume at the intraday highs was already indicative of "churning," or
institutional selling into strength. Therefore, we would not necessarily expect
volume to rise again during yesterday's losses. Still, it would have been even
worse if Monday's "churning" was followed by a session of higher volume losses.
Market internals were not that bad. In the NYSE, declining volume exceeded
advancing volume by a margin of 5 to 2, but the Nasdaq adv/dec volume ratio was
only fractionally negative.
In yesterday's Wagner Daily, we
suggested "dipping a toe in the water" on the short side of the market.
Specifically, we liked the idea of initiating a new short position in the
financial sector, as many of the banking and broker/dealer stocks had run into
resistance of their recent highs. As for a specific ETF to take advantage of
anticipated weakness in the financials, we pointed out the UltraShort Financials
ProShares (SKF), which "undercut" its 200-day moving average on Monday. When SKF
immediately moved back above its 200-day MA on yesterday's open, we bought a
position. This worked out rather well, as SKF rallied as much as 10.6% intraday
before finishing the session with a whopping 8.2% gain. Below is a daily chart
of the inversely correlated and leveraged SKF, which moves in the
opposite direction of a diverse portfolio of financial stocks:
On the chart above, we have circled the intraday "undercut," which occurs
when a stock or ETF dips below an obvious area of support, but quickly reverses
back above it. When I first began my trading career, I frequently made the
mistake of initiating a short position as soon as a stock dipped below a key
area of support.
