Shaking off early weakness following the previous day's breakout to new highs, stocks recovered to close with mixed results yesterday. The major indices chopped around in negative territory throughout the morning session, reversed at mid-day, then drifted higher in the afternoon. The S&P 500, down 0.6% at its intraday low, eked out a closing gain of 0.1%. The Nasdaq Composite and Dow Jones Industrial Average both advanced 0.3%. Small and mid-cap stocks lagged behind again. The Russell 2000 and S&P Midcap 400 indices slipped 0.1% and 0.2% respectively. Showing resilience into the close, the main stock market indexes finished at their best levels of the day.
As commonly occurs on consolidation days, turnover receded across the board. Total volume in the NYSE was 15% lighter than the previous day's level, as volume in the Nasdaq eased 12%. Even though the S&P and Nasdaq registered a bullish "accumulation day" by gaining on higher volume on Monday, it's been 11 days since the Nasdaq printed above average volume. Overall, trade remains slow and reminiscent of the summer doldrums. With the Thanksgiving holiday on tap next week, volume has a very good chance of remaining lethargic through the end of the month. When heavy institutional trade eventually returns to the market, it will be important to observe the broad market's price direction that accompanies the increased turnover.
Many industry sector ETFs that have been following the major indices are starting to appear technically "overbought" on a short-term basis. Nevertheless, this certainly does NOT mean they can't continue moving substantially higher without pulling back. Still, entering most of these ETFs at current levels now becomes a simple matter of analyzing the reward-risk ratio. Even if these ETFs continue higher, we're not very interested in buying if the potential upside reward is not at least twice as great as the required stop loss to the downside. Instead, we would opt for putting these strongest ETFs onto on a watchlist for potential buy entry on the next broad market pullback to support.
Over the past week, we've been observing stealth relative strength in a few sector ETFs that were formerly not doing much of anything, or even lagging the market. On a longer-term basis, their relative strength versus the broad market is still low. However, these ETFs may provide short-term traders with a profitable, momentum-based pop in the coming days. Since these ETFs with newly developing relative strength have generally been out of sync with the direction of the broad market, there is perhaps a lesser chance of a sharp reversal lower if the major indices suddenly pull back as well. The first ETF on our radar screen is S&P Homebuilders SPDR (XHB).
