Appearing to blow off the weakness in the latter half of last week, stocks rallied to close above last week's highs, but lighter volume failed to confirm the bullish price action. The major indices opened near the previous day's highs, oscillated in an indecisive range throughout the first half of the day, then grinded higher later in the afternoon. The S&P 500 and Nasdaq Composite registered matching gains of 1.5%. The Dow Jones Industrial Average climbed 1.3%. The small-cap Russell 2000 and S&P Midcap 400 indices forged ahead with advances of 1.6% and 2.1% respectively. Fighting off last-minute selling pressure in the final thirty minutes of trading, the main stock market indexes finished near their intraday highs.

The resilience of yesterday's price action was encouraging, but the one thing lacking from the rally was higher volume. Turnover in the NYSE was 20% lighter than the previous day's level, while volume in the Nasdaq dipped 1%. Trading in the Nasdaq slipped back below 50-day average levels. Nevertheless, market internals were firmly bullish. Advancing volume in the NYSE led declining volume by a margin of more than 8 to 1. The Nasdaq adv/dec volume ratio was positive by 4 to 1.

In yesterday morning's commentary, we talked about the relative strength numerous currency, commodity, and fixed-income ETFs were starting to exhibit. Most followed through with another round of solid gains in yesterday's session, moving further above their breakout levels. PowerShares Base Metals (DBB) rallied 6.2%, Market Vectors Coal (KOL) jumped 4.0% (to a new 11-month high), and U.S. Oil Fund (USO) gained 3.0%. Even the laggard U.S. Natural Gas Fund (UNG), trading at approximately 150% of its average daily volume yesterday, rocketed 8.5% higher. UNG also moved back above its 50-day moving average for the first time in more than five weeks. This is shown on the daily chart of UNG below:



Despite yesterday's huge gain, we are not advocating a buy entry into UNG. This is because the ETF has shown relative weakness by being one of the last commodity ETFs to move back above its 50-day moving average and prior swing high. Rather, we are pointing this out to show that even the laggard ETFs in the commodity sector are starting to show strength. When that happens, it's a good sign of institutional money flow into the sector. As such, positions in commodities such as gold, silver, and oil seem to be relatively low-risk at this time. Most foreign currency ETFs also continued higher yesterday, following through on last Friday's breakdown to a new low in the U.S. Dollar Bullish Index (UUP)..

Because the chart patterns of the main stock market indexes from last Thursday and Friday were bearish, yesterday's rally to close above last week's highs initially seems to be very bullish. But one surprising factor was the lack of momentum that followed the breakout above the range. When a bearish pattern appears on a candlestick chart, a rally above the highs of that day's range usually leads to an upward surge. This is because bears who sold short into the bearish pattern are typically quickly forced to cover their positions when this occurs. At the same time, bulls who sold long positions into strength simultaneously buy back into their strong positions they just sold. However, this was not the case yesterday. After rallying above last week's highs, the major indices deliberated, and then begrudgingly moving higher. Overall volume remained stagnant as well. This leaves us suspect of yesterday's broad market gains; yet, sellers seemed content to let it roll and remain on the sidelines.

Even though yesterday's rally may have lacked elements of conviction, there is little in the way of overhead resistance levels to keep the market down. Whether or not one thinks the market is "overbought" right now is irrelevant. The simple fact of the matter is it only takes more buyers than sellers to move a market higher -- even if institutional buying is lacking. As long as the market continues to move higher, it makes no sense to fight it. Still, it's prudent to act with caution when the masses are not. Focusing on strong ETFs with low correlation to the market is a good way to take advantage of profitable opportunities in the market, but without exposing one's self to inordinate risk. With numerous currency, commodity, and fixed-income ETFs just starting to break out above bases of support, one need not chase ETFs that are well extended beyond their breakout levels.

Open ETF positions:

Long - DGP, FXB, FXY
Short - (none)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.