We concluded yesterday's newsletter by saying, "Be alert and prepared for continued indecision in the short-term." Yesterday's swift reversal that followed Wednesday afternoon's ugly sell-off was a good example of why we signed off with that advice. Keeping traders on their toes, the Nasdaq took another stab at moving above its 50-day moving average yesterday morning; this time the rally held up (at least for the day). Though the major indices opened approximately 1% lower, the bulls immediately stepped in to the provide support. Stocks subsequently trended higher throughout the morning, logging substantial gains by mid-day, then consolidated in a sideways range into the close. Maintaining its recent show of relative strength, the Nasdaq Composite climbed 2.1%. The S&P 500 advanced 1.6% and the Dow Jones Industrial Average gained 1.3%. The small-cap Russell 2000 and S&P Midcap 400 indices finished higher by 1.5% and 1.6% respectively. The main stock market indexes finished in the upper quarter of their intraday ranges.
Volume in both exchanges surged to its highest levels in weeks, helping to invalidate the bearishness of the previous day's distribution. Turnover in the NYSE zoomed 17% above the previous day's level, while volume in the Nasdaq similarly ticked 15% higher. The sharply higher volume enabled both the S&P 500 and Nasdaq Composite to score a bullish "accumulation day" for the second time within the past four days, but don't forget the other two sessions were bearish "distribution days." With the broad market seesawing between higher volume losses and higher volume gains throughout the week, it's been a tricky environment for technical traders. Nevertheless, it's positive that both days of higher volume losses were immediately followed by even higher volume gains. It's particularly notable that yesterday's trading was the busiest in weeks. This tells us institutions may be starting to "dip a toe in the water" of the buy side.
Yesterday, we analyzed a potential play that was setting up in UltraShort Oil and Gas ProShares (DUG), and subsequently discussed the "Short" and "UltraShort" ETFs in general. Thereafter, we received an e-mail from a subscriber, asking if we were aware of the long-term underperformance of some ETFs in this group. Since we trade ETFs every day, we were indeed already aware of this problem, but, for the sake of simplicity, chose not to discuss the issue because we felt the problem had little relevance to the type of short-term, momentum-based trading this newsletter is focused on. But upon further contemplation, we decided it would actually be a good idea to make sure subscribers are aware of the shortcomings of some of these inversely correlated ETFs.
Put simply, several of the sector-specific "Short" and "UltraShort" ETFs have had an extremely low inverse correlation to the underlying sectors they represent.
