Stocks kicked off the holiday-shortened week with the bulls in control, sending the major indices sharply higher, but volume levels remained well below average. After opening lower, the main stock market indexes promptly reversed, trending steadily higher through mid-day. Thereafter, stocks consolidated in a sideways range throughout the afternoon. The Nasdaq Composite jumped 3.5%, the S&P 500 2.6%, and the Dow Jones Industrial Average 2.4%. The small and mid-cap sectors showed the most leadership; the Russell 2000 surged 4.8% higher and the S&P Midcap 400 advanced 3.8%. All the major indices closed near their intraday highs.
Total volume in the NYSE increased 32% above the previous day's level, while volume in the Nasdaq similarly rose 30%. The sharp gains on higher volume technically caused both the S&P 500 and Nasdaq Composite to register a bullish "accumulation day." However, it would be deceiving to say institutional accumulation was clearly prevalent. This is because the previous day's, pre-holiday session was the lightest volume day in more than five months. Therefore, despite yesterday's higher turnover, volume in both exchanges remained well below 50-day average levels. Trading was even lighter than during last Thursday's broad-based sell-off. Overall, price action in the market was definitely positive, but unimpressive volume gave us cause for suspicion.
One sector that's started showing relative strength to the broad market is healthcare. Typically, this sector is viewed as "defensive" in nature, so it often has a tendency to see positive money flow when the broad market is weakening. Yet, the healthcare arena is also showing strength when the major indices rally. This has created a few ETF setups we're monitoring for potential buy entry. S&P Healthcare SPDR (XLV) is one such ETF we're stalking. Its daily chart is shown below:
The iShares Nasdaq Biotech (IBB) has been choppier, but it too is nearing a potential breakout level that could generate substantial upside momentum in the short-term. Take a look:
On a completely different note, the PowerShares G10 Currency Harvest Fund (DBV) is showing an interesting chart pattern that has the potential for an explosive (relatively speaking) move to the upside. If you're not familiar with this unique ETF, here's a description of it, straight from the PowerShares.com web site: "The PowerShares DB G10 Currency Harvest Fund is based on the Deutsche Bank G10 Currency Future Harvest Index - Excess Return™ (Index) and managed by DB Commodity Services LLC. The Index is comprised of currency futures contracts on certain G10 currencies and is designed to exploit the trend that currencies associated with relatively high interest rates, on average, tend to rise in value relative to currencies associated with relatively low interest rates. The G10 currency universe from which the index selects currently includes U.S. Dollars, Euros, Japanese Yen, Canadian Dollars, Swiss Francs, British Pounds, Australian Dollars, New Zealand Dollars, Norwegian Krone and Swedish Krona. Ordinary brokerage commissions apply." Below is the daily chart of DBV:
The price of DBV is now being squeezed between support of its ascending 50-day moving average (the teal line) and resistance of its descending 200-day moving average (the orange line). Though the 200-day MA normally welds more power than the 50-day MA, DBV has already tested that resistance level several times this month. Each subsequent test weakens that resistance level, until DBV eventually gathers enough momentum to breakout above the 200-day MA. Given that DBV has been consolidating in a tight range for the past several months, odds favor an upside breakout above the 200-day MA, more than a breakdown below the 50-day MA. For price confirmation, we like it for long entry on a rally above the May 19 high of $21.17. If trading DBV, a stop of just one point should be sufficient, as it has a low volatility. As such, be sure to adjust your share size high enough to account for a stop that is tighter than most other setups.
Despite yesterday's large gains, the technical picture of the main stock market indexes has not changed. The S&P, Nasdaq, and Dow all remain trapped in the middle of their multi-week trading ranges, which we illustrated with the chart of the S&P 500 in yesterday's commentary. Until we see a definitive breakout of the recent ranges, in either direction, we cannot place much faith in the day-to-day market gyrations. Keeping a healthy portion of cash in your portfolio is a great way to prevent churning your account until the market eventually makes up its mind.