The bulls and bears battled it out in a tug-of-war yesterday, as stocks indecisively rolled over peaks and valleys throughout a rather wide-range day. But by the closing bell, the bulls had the upper hand. The major indices gapped sharply lower on the open, recovered in the morning, sold off to new intraday lows at mid-day, then reversed again into the close. The benchmark S&P 500, down 1.5% at its mid-day low, finished with a respectable gain of 0.4%. The Dow Jones Industrial Average advanced 0.3% and the Nasdaq Composite climbed 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices lagged behind again, gaining just 0.2% and 0.1% respectively. Each of the main stock market indexes closed near its intraday high for a change.

The most positive part of yesterday's session was that higher turnover matched the bullish closing action. Total volume in the NYSE increased 14%, while volume in the Nasdaq surged 28% above the previous day's level. In both exchanges, trading exceeded 50-day average levels by a significant margin. The heavier trading activity tells us that institutions were finally toying with the long side of the market. Advancing volume was roughly on par with declining volume in both the NYSE and Nasdaq.

Throughout recent months, the financial sector has been a leading indicator of the direction of the broad market. This still appears to be the case, as a late-day bullish reversal in both the Bank Index ($BKX) and Amex Securities Broker-Dealer Index ($XBD) yesterday afternoon was the reason the main stock market indexes rallied into the close as well. Volume in most of the financial ETFs also spiked higher yesterday, hinting at possible capitulation. Because the financials have been beaten down so badly, the sector could easily bounce significantly higher in the near-term. We point out the likely bounce in the financial sector only because it could spark a tradeable, countertrend bounce in the broad market, not because we advocate trying to catch a falling knife. With the financial stocks at multi-year lows, there is a ton of overhead supply, so the sector is best left alone, at least until the various financials ETFs start breaking out above their 20-day moving averages.

If financials manage to lead the stock market higher in the near-term, long entries should be considered only in ETFs that have recently shown relative strength to the broad market. The Biotech HOLDR (BBH) is one such ETF. While the major indices were getting slaughtered last month, BBH simply held in a sideways range. BBH closed the month of June with a 1.8% gain, which compared quite favorably to the 8.4% loss in the S&P 500. When ETFs exhibit relative strength by trading sideways as the major indices are moving lower, they are typically the first ETFs to surge higher when the broad market eventually bounces.