In keeping with the true fashion of nearly every day of September, stocks wrapped up the third quarter of 2008 with a sharp, whipsaw reversal in the opposite direction of the previous day's move. Not to be outdone by Monday's sell-off flashing the worst percentage losses in many years, the bulls aggressively reversed stocks in the opposite direction yesterday, dizzying traders and enabling the major indices to score their biggest single-day gains in years. The S&P 500 rallied 5.3%, the Nasdaq Composite 5.0%, and the Dow Jones Industrial Average 4.7%. Small caps showed slight relative weakness, as the Russell 2000 gained 3.3%. The S&P Midcap 400 climbed 4.2%. Recovering more than half of the previous day's losses, the main stock market indexes closed near their best levels of the day.
Unfortunately for investors, one key element missing from yesterday's advance was higher turnover. Total volume in the NYSE eased 27% below the previous day's level, while volume in the Nasdaq receded 18%. In both exchanges, trading still exceeded 50-day average levels, but the lower overall volume prevented stocks from scoring a bullish "accumulation day" that would have indicated the confirmed presence of institutional buying. Market internals were quite solid, but not as positive as the negativity of Monday's levels. Advancing volume in the NYSE exceeded declining volume by a margin of 8 to 1. The Nasdaq adv/dec volume ratio was positive by nearly 6 to 1.
In addition to the lower volume levels, another important aspect lacking from yesterday's rally was leadership among top stocks. After scanning through all of yesterday's top-gaining stocks and ETFs, we observed a vast majority of them were in the beaten-down banking and insurance sectors. Conversely, leading biotech and medical stocks, belonging to the very few industry sectors still showing a bit of relative strength, barely kept pace with the gains of the broad market. In a healthy market, broad-based rallies are led by top growth stocks, not stocks and sectors merely bouncing off multi-year lows.
Though we wish there was more to discuss today, there's really nothing to do until Congress comes back to us with another vote on the (modified?) $700 billion financial bailout package. We've been led to believe this will happen sometime this week, but not before tomorrow. Further, the fact that yesterday's rally lacked leadership is a very good reason for us to continue sitting on the sidelines. After Monday's sell-off, we received a few e-mails from subscribers, asking why we didn't buy any of the inversely correlated UltraShort ETFs. Then, after yesterday's huge rally, a few subscribers actually inquired as to why we didn't get long the market. In both cases, the answer is simple -- unless you're merely daytrading the current market, the odds of a tradeable trend developing for more than a single day are slim. Why chop up our trading account in this spastic market? Instead, we're opting to simply observe this most unusual tug-of-war between the bulls and bears, rather than getting stuck in the middle of it. Nevertheless, we'll be more than ready to jump back in the market as soon as things settle down and a new trend develops. The first sign of decent buying interest among leading stocks will also get our attention. In tomorrow's newsletter, we'll analyze the "big picture" of the stock market by taking an updated look at the long-term monthly charts of the major indices.