Stocks began the holiday-shortened week on a rather bullish note yesterday, as relative strength in the tech sector sent the Nasdaq Composite and Nasdaq 100 indices to fresh 52-week highs. The major indices lurched higher in the first hour of trading, then drifted sideways throughout the rest of the day. By day's end, the Nasdaq Composite was 1.2% higher, the S&P 500 1.1%, and the Dow Jones Industrial Average 0.8%. Small and mid-caps continued to cruise higher as well. The Russell 2000 and S&P Midcap 400 indices gained 1.3% and 1.4% respectively, causing the latter index to join the Nasdaq at a new high of the year. A touch of late-day weakness caused the main stock market indexes to merely finish near the upper third of their intraday ranges.

One key element missing from yesterday's rally was high volume. In the NYSE, turnover sank 60%. Total volume in the Nasdaq was 34% lighter than the previous day's level. Though one might not have expected volume to be higher than last Friday's "quadruple witching" and S&P rebalancing day, it was notable that trading failed to even exceed 50-day average levels. This tells us institutions were apparently on the sidelines, rather than participating in the buying. This is likely to be the case until the upcoming holidays have at least passed.

Semiconductor HOLDR (SMH) broke out of from its tight range yesterday, powered by a strong gap up on the open. We remain long from our 12/15 buy entry, which is now in the money.




In yesterday's report, we mentioned the bullish action in the S&P Energy SPDR (XLE). In addition to XLE, iShares S&P Natural Resources (IGE) is also setting up for a downtrend line breakout on the chart below:




Where XLE is more of a pure energy play, IGE is comprised of energy, metals and mining, agriculture, and paper stocks. The buy entry is on a break of the downtrend line, which should put the action back above the 50-day MA.

Market Vectors Agribusiness (MOO) is in pullback mode after a strong run up off the November lows. The 12/17 shakeout bar undercut the lows of the tight range and the 20-day EMA, taking out many protective stops in the process. A move above the two-day high is an aggressive buy entry. Those looking for more confirmation can wait for the action to hold above the short-term downtrend line and clear the high of December 17.




Yesterday, the Nasdaq Composite became the first of the major indices to finally break out above its six-week long sideways range. This tells us bets on the long side of the market should continue to include tech positions, though a few other sectors such as energy and agriculture are also perking up. But despite the breakout in the Nasdaq, we are suspicious of the light volume that accompanied the rally. Considering the Nasdaq was in a tight range for six weeks, one might have expected a more explosive breakout. Perhaps traders are waiting for the broader-based S&P 500 to eventually make a definitive breakout of its range as well, before getting too aggressive on the buy side. Until the S&P proves otherwise, stocks simply remain in a choppy, sideways arena, one that should be traded cautiously and with reduced share size on both sides of the market.


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Open ETF positions:

Long - SMH
Short (including inversely correlated "short ETFs") - FAZ, EEV

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.