The Trader Daily

 | Apr 04, 2014 | 8:00 AM EDT
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A quick glance at the SPDR Dow Jones Industrial Average ETF (DIA) or SPDR S&P 500 ETF Trust (SPY) and everything looks fantastic. Both ETFs finished less than 60 cents from all-time highs. If we shift our focus to the iShares Russell 2000 Index ETF (IWM) and PowerShares QQQ Trust ETF (QQQ) we see a moderately less rosy picture, but still, nothing too horrible. Unfortunately, these indices are masking some ugly action. 

So where's all this weakness?

Flip through stocks like Facebook (FB), Amazon (AMZN), Yelp (YELP), Splunk (SPLK), FireEye (FEYE), and Twitter (TWTR). Or how about 3D Systems (DDD), Stratasys (SSYS) and Voxeljet (VJET). Remember the China favorites Sina (SINA) and Baidu (BIDU)? The bottom line is that many of the most popular momentum names have been suffering for weeks now. Some in silence, others not so much as they are discussed ad nauseam by the guys on CNBC's Fast Money and the aggressive option traders on Twitter. 

Our current leaders are stocks like Microsoft (MSFT), Hewlett-Packard (HPQ), Texas Instruments (TXN), Corning (GLW) and bloody near anything involved in the semiconductor space. Think about that for a moment. When was the last time Microsoft and Hewlett-Packard lead the technology sector in anything? And Corning, a stock that admittedly isn't particularly expensive on any metric, is up 21% since the start of the year. That's a heck of a move for something that isn't engaged in the 3-D printing of a potato chip, or the manufacturing of a fuel cell.

I've held both Microsoft and Corning in a long term, value focused account for quite some time. So while it's not in my best financial interest to make fun of them, the short term trader in me gets concerned when low-growth, low-multiple tech stocks steal the show from the glitzier momentum players.

Old tech isn't the only thing trading higher. The persistent strength in consumer durables, integrated oil and gas, oil servicers, pharmaceuticals and utilities tells us what market participants want. They want safety and yield. Anytime folks are flocking to safety, that should make aggressive, momentum oriented bulls take a step back and reconsider their positions. 

So how do index traders put this information to good use?

We begin by recognizing that small cap, momentum oriented sectors are struggling. As long as momentum has an offer above its head, and safety is in vogue, we know to expect more aggressive selling in the IWM and QQQ any time the markets begin to wobble. I've shared my view on numerous occasions that both the QQQ and IWM appeared vulnerable to a persistent sell the rip mentality. And a quick review of Thursday's intraday charts clearly shows where the aggressive sellers where focused.

This is not to say we can't sell short the SPY and DIA. It's simply a reminder that the aggressive sellers are not currently positioned in that area of market. 

Just for fun, let's look at a weekly chart of the Select Sector Financial SPDR ETF (XLF). I'm post this chart for those wondering what might shift the winds of selling away from the QQQ and IWM, and more toward the SPY and DIA. Ignoring the obvious fact that the financials are not the only driver of the SPY, I think the longer term negative divergences in the XLF are worth a look.


Select Sector Financial SPDR ETF (XLF) Weekly
Source: eSignal


As far as Friday's SPY trading is concerned, we need to get past the employment report to have any concrete idea of what we are going to do. That said, my current plan is to focus on 188.90. Failure to sustain a push above that level encourages traders to sell the ETF back down toward 188.20 and 187.65. While anything above 188.90 should have sellers sitting on their hands, and active participants either stalking longs, or heading out early for a long weekend.


E-Mini S&P 500 -- Five-Minute Volume Profile
Source: eSignal

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