Stocks concluded last week's session on a rather bright note, as the major
indices motored to new "swing highs" within their developing uptrends. Roaring
back from the previous day's losses, the S&P 500 gained 2.4%, the Nasdaq
Composite 2.5%, and the Dow Jones Industrial Average 2.7%. The small-cap Russell
2000 and S&P Midcap 400 indices climbed 2.9% and 2.2% respectively. Each of
the main stock market indexes finished at its highest level of the day
and week, positioning the stock market for bullish momentum to start the
new week.
The percentage gains of last Friday's broad-based advance were certainly
impressive. However, it's important to note the major indices broke out on
lighter volume. Total volume in the NYSE declined 6%, while volume in the Nasdaq
was 1% lower than the previous day's level. With such massive gains, one would
have expected higher turnover to confirm the gains, especially considering the
technical significance of the major indices breaking out above their prior highs
from last month. Further, volume in both exchanges was even below 50-day average
levels. When stocks are rallying on light volume, it only takes one session of
institutional selling to undo a string of gains. As such, last Friday's mediocre
market performance "under the hood" keeps our bullish enthusiasm a bit
restrained going into today.
Despite continued improvement in the overall bias of the broad market, there
are still a rather limited number of bullish ETF chart patterns. This is
primarily because most ETFs are rallying off their recent lows, and still remain
below their 20 and/or 50-day moving averages. In those instances, the abundance
of overhead supply usually leads to choppy, indecisive trading. Instead, we've
been looking for ETFs trading above their 20, 50, and 200-day moving averages,
as well as those that are near their 52-week highs.
Due to institutional rotation of funds into the sector, Healthcare-related
ETFs are still showing the most relative strength. iShares Medical Devices
(IHI), which we initially discussed in the August 6 issue of The
Wagner Daily, broke out to a fresh all-time high last Friday. iShares
Health Sector Index (IYH), which we bought on August 5, rose 2.2% to a new
multi-month high last Friday. Biotechnology ETFs, with tickers including BBH,
IBB, and XBI, corrected sharply on August 7, but raced back convincingly the
following day. After last week's shakeout, the biotech ETFs could break out to
new highs this week. If they do, a rally above the highs of their recent
consolidations would present ideal buy points to enter or re-enter the sector.
If buying only one sector in the market, healthcare (biotech, medical
devices, pharmaceuticals) may be the best place to deploy your funds right now.
