Momentum from the previous day's solid close enabled stocks to jump higher out of the starting gate yesterday morning, but subsequent intraday strength failed to develop. After oscillating in a sideways range throughout most of the day, the broad market drifted back down in the final ninety minutes of trading. However, the major indices still finished in positive territory, and at or above their previous day's highs. The Nasdaq Composite gained 0.3%, the S&P 500 0.2%, and the Dow Jones Industrial Average less than 0.1%. Small and mid-cap stocks again led the charge, as the Russell 2000 and S&P Midcap 400 indices rallied 0.9% and 0.8% respectively. Showing continued relative strength, the S&P Midcap 400 became the first of the main stock market indexes to close above resistance of its January 2010 high. The Russell finished only fractionally below its highest close of the year. While the S&P and Dow settled in the bottom quarter of their intraday ranges, the Russell and S&P Midcap closed near the upperquarter of their ranges.

Turnover rose across the board, as institutional activity continued to pick up. Total volume in the Nasdaq swelled 14%, marking the most active day in the Nasdaq since the recovery off the February 5 lows began. Turnover in the NYSE similarly rose 12% above the previous day's level, but volume remained below its 50-day average level. to the markets. Because it was a trend day higher, Monday's higher volume was a positive sign of institutional accumulation. However, with the S&P and Nasdaq closing near their intraday lows, after chopping around throughout yesterday's session, the faster pace of trading was more representative of "churning" than confirmed buying. Like the previous day, market internals indicated only moderately positive market breadth.

The major indices have really started to show significant divergence amongst one another. Yesterday, for example, the S&P Midcap 400 cruised to a fresh 52-week high. However, the laggard Dow Jones Industrial Average is only barely trading above its 50-day moving average, and is still below last week's "swing high" resistance level. The rest of the main stock market indexes lie somewhere in-between. Below is a chart that compares the percentage changes of the main stock market indexes since forming their "swing lows" on February 5:



In order to have the best chance for profitability in the current, short-term rally, it's important to focus on specific sectors and industries showing the most relative strength to the overall stock market. As the chart above indicates, this would primarily be the small and mid-cap stocks. Breaking it down further, we are seeing the most leadership in Retail, Biotechnology, and Technology sectors. Presently, the Retail and Biotechnology ETFs are substantially extended above their recent breakout levels, as they trade at new 52-week highs. As such, they would now only be buyable on pullbacks to short-term support, such as their breakout levels or 10-day moving averages. But several of the technology ETFs are now waking up, and may present actionable trade setups within the next day or two. Representative of the overall pattern in the technology arena is iShares U.S. Technology Sector Index (IYW). As the daily chart below indicates, a rally above yesterday's high should confirm the reversal back above the 50-day MA. Assuming it "sticks," a move back to the January 2010 highs should follow shortly thereafter (as was the case with the S&P Midcap and Russell 2000 indices):



As Technology is perking up and Retail/Biotechnology leading, the Achilles' heel of the broad market's present strength is continued weakness in the Financial sector, specifically within Regional Banking shares. However, if this sector can finally get in gear, breadth would improve, adding more fuel and conviction to the stock market's recovery off last month's lows. Many of the Financial ETFs are nearing key resistance levels that could lead to a breakout. We're monitoring the pattern of the Regional Bank HOLDR (RKH), not for a potential buy entry, but as an indicator for the health of the broad market rally. Particularly, we're looking for RKH to breakout above its intermediate-term downtrend line, annotated on the daily chart below:



Of the more than 300 ETFs we monitor on a daily basis, we're not seeing many actionable trade setups for entry right now. But if this rally is for real, plenty of nice opportunities will soon present themselves. In the meantime, we can only take what the market gives, while focusing on trading what we see, not what we think.

Open ETF positions:

Long - FXI
Short (including inversely correlated "short ETFs") - (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.