September 16, 2010
Opening near the previous day's lows, stocks got off to a negative start yesterday morning. However, the major indices clawed their way back as the day progressed. By the closing bell, the broad market had managed to finish moderately higher. The S&P 500 Index and Dow Jones Industrial Average registered matching gains of 0.4%. The Nasdaq Composite rose 0.5%. The small-cap Russell 2000 Index and S&P Midcap 400 Index advanced 0.5% and 0.4% respectively. All the main stock market indexes settled near their intraday highs.
In both the NYSE and Nasdaq exchanges, total volume was 2% lighter than the previous day's levels. Turnover in the NYSE was lighter than average, but trading in the Nasdaq remained above its 50-day average level. In the Nasdaq, advancing volume exceeded declining volume by nearly 2 to 1. The NYSE adv/dec volume ratio was only fractionally positive.
One of the major drags on the broad market lately has been the poor performance of the semiconductor sector. The industry began showing relative weakness early last month, and continues to do so at the present. While most of the main stock market indexes are now testing resistance of their August 2010 highs, the Semiconductor HOLDR (NYSEARCA:SMH), a popular ETF proxy for the semiconductor industry, has barely bounced off its August lows. This is shown on the daily chart of SMH below:
Although SMH is above its 20-day exponential moving average, it is still well below both its 50 and 200-day moving averages. This means there is a ton of overhead resistance and supply the semiconductor sector must contend with in order to catch up with the near-term bullish performance of the broad market. Another way to see the relative weakness in the semiconductors is with a "percentage change chart" that compares the relative performance of Semiconductor HOLDR (SMH) versus the S&P 500 SPDR (NYSEARCA:SPY). On the chart below, it is easy to see what a laggard SMH has been since the beginning of August:
Obviously, there are typically at least one or two sectors that typically lag the broad market in any environment or trend. However, because the semiconductor sector is so heavily weighted with in the Nasdaq, this bears notice. Unless the semiconductor sector gets in gear, it will continue to hold the Nasdaq in check. Likewise, SMH and other semiconductor ETFs should be the first to head back down to the prior lows on a significant correction in the broad market. For that reason, we remain long the inversely correlated ProShares Ultrashort Semiconductor (NYSE:SSG).
Despite yesterday's gains, the major indices still closed at, or just below, their previous day's highs. As such, the S&P and Nasdaq still remain below resistance of their August highs, though one more day of solid gains would cause them to breakout. Nevertheless, the short-term technical picture has not yet changed. The bottom line is we are stuck in a market that is unconvincing and unenthusiastic with moves in either direction, although the bulls have slightly had the upper hand lately. We remain prepared for high volatility near these pivotal levels of the market, and are content to be approximately 50% cash in our model ETF portfolio.
Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also 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. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to: firstname.lastname@example.org.
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