Stocks posted strong gains on Monday, but on light trade. All the major indices closed higher on the day. The Nasdaq led the advance, as it tacked on an impressive 2.4%. The S&P MidCap 400 and the small-cap Russell 2000 gained 2.2% and 2.3% respectively. The S&P 500 managed a 1.6% advance, while the Dow Jones Industrial Average was the day’s laggard. The blue chip index ended the session just 1.1% higher.
Market internals snapped a four day bearish spiral to close mixed on Monday. Volume plummeted on the Nasdaq by 31.0% and on the NYSE by 32.7%. Monday’s turnover was light, even when measured against Friday’s options expiration. Advancing volume did, however, outpace declining volume on both exchanges. By the closing bell, the spread ratio stood at a plus 4.8 to 1 on the NYSE and a plus 5.2 to 1 on the Nasdaq.
Since selling pressure hit the market in early May, the Direxion Financial Bear 3x ETF (NYSEARCA:FAZ) has shown relative strength, as it was one of the first inverse ETFs to break out during the selloff. Yesterday, FAZ managed to hold support at Friday’s low as financials remained weak. An “undercut” of the 10-day MA and the formation of a reversal candle could offer a buying opportunity in this ETF. In addition to ProShares UltraShort Euro (NYSEARCA:EUO) and DB Gold Double Short ETN (NYSEARCA:DZZ), both of which were analyzed in yesterday’s newsletter, we will now be monitoring FAZ closely for a potential swing trade entry as well.
On yesterday’s open, we closed our positions in $RTH short, $XLY short, and $TZA long for a combined 3% gain in the value of the model ETF portfolio. We are now sitting in a 100% cash position, after having locked in a string of winning gains (short positions of inverse ETFs) over the past two weeks. Although yesterday’s price action was solid, it was overshadowed by the lack of institutional participation in the move higher. For the moment, we remain bearish and will continue to pursue short setups into any market rallies. However, as might be expected following a two week selloff, our research has uncovered virtually no short setups at the moment and we anticipate a few days of buying or sideways action prior to any potential move lower. We intend on exercising patience until the next wave of opportunities present themselves.