Tuesday was a very bright day on Wall Street. In an impressive showing of strength, stocks erased virtually any hint of last Friday's distribution. For the second consecutive day, all of the major indices closed higher. However, unlike Monday, yesterday's volume was strong. Leadership returned to the market with the small-cap Russell 2000 leading the way. The small-cap index posted an impressive 2.2% advance on the day. The technology rich Nasdaq ended the session higher by 1.9%, while the S&P 500, the S&P MidCap 400 and the Dow Jones Industrial Average improved on Monday's gains by 1.7%, 1.5% and 1.3% respectively.

Although market internals ended the day mixed, the tone of the market was bullish. Volume was up sharply on the Nasdaq (+18.6%), but down modestly on the NYSE (-2.3%). Advancing volume overpowered declining volume by a ratio of 7.4 to 1 on the NYSE and 2.8 to 1 on the Nasdaq. Still, the lighter volume on the NYSE does pose some concern about the conviction of yesterday's move.

Yesterday, our short position in EPU hit its stop and we exited the trade with a loss. PHO made a strong move yesterday and appears well positioned to meet its target. Due to the strong rally in KBE yesterday, we are removing it from the watchlist.

The iShares S&P SmallCap 600 Growth ETF (IJT) has been consolidating for the past 8 weeks in a $2.50 trading range. A volume driven move back above the January 14 high of $74.38 could provide a buy trigger for this ETF. We are Placing IJT on the watchlist. Our subscribing members can find trade details in the watchlist segment of the newsletter.



In the January 28 newsletter we stated, "Since losing Support on January 24, the iShares MSCI Thailand Investable Market Index ETF (THD) has spent the past three sessions rallying back towards resistance. A move back into the $61.00 - $62.00 range offers a possible short trigger for this ETF". Since then THD has continued to exhibit relative weakness. If current form holds, THD may not find its way back to this level. The next pullback in the market should provide a shorting opportunity in THD.



Yesterday's broad based rally repaired a lot of the damage done last Friday. There's evidence that retail buyers are back in the market which may be a sign that a "blow off" top is near. In the meantime, the broad market remains in an uptrend. The past three days have reinforced our opinion that profits should be taken quickly. The Dow Jones Industrial Average, the S&P 500 and the NYSE all closed at fresh 52-week highs. However, the Nasdaq, the S&P MidCap 400, and the small-cap Russell 2000 did not follow suit, as they remain in their four-week trading ranges. This divergence suggests sector rotation, which is supported by the recent advance in oil, energy, and agricultural ETFs (all previous market laggards).

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.