After beginning the day with a modest rally out of the starting gate, stocks drifted in a narrow, sideways range throughout most of the session, but a rapid selloff in the final forty-five minutes of the session registered losses in the broad market. The Nasdaq Composite again showed the most relative weakness and finished 0.8% lower. The S&P 500 fell 0.4%, while the Dow Jones Industrial Average lost only 0.2%. Mid-cap stocks held up pretty well, enabling the S&P Midcap 400 Index to post a 0.2% gain, but the small-cap Russell 2000 slid 0.5%. Each of the major indices finished near the bottom of their intraday ranges, pointing to institutional selling throughout the "professional hour" (the final hour of each trading day).

Despite yesterday's losses, volume declined in both exchanges. Total volume in the NYSE was 3% lighter, while volume in the Nasdaq was 17% lower than the previous day's level. Turnover did, however, increase a bit during the final hour of the session. Volume also came in above 50-day average levels in both exchanges. From March 20 through April 17, volume in the NYSE was so light that it exceeded its average level in only one of those twenty days. But since then, volume has exceeded its average level in nine of the past ten days. Comparing this pattern with the price action in the broad market, we see that volume has been at its highest level while the S&P has been consolidating near its highs over the past several weeks. When volume levels are increasing, but prices are not increasing along with the higher turnover, this is bearish action referred to as "churning" and indicates institutional selling into strength. Conversely, increasing volume levels would be very positive if the market was moving higher as well, but that has not been the case. Often, this "churning" near resistance of a prior high precedes a breakdown in the broad market. As we pointed out last week, several of the broad-based ETFs registered record high volume levels on April 27, but without a significant gain in prices. We still believe that day was significant, as professional traders are aware that volume is one of the few technical indicators that never lies.

One interesting pattern of sector rotation we have seen over the past several days has been the divergence between the Banking Index (BKX | Quote | Chart | News | PowerRating) and the Broker-Dealer Index (XBD | Quote | Chart | News | PowerRating). As we have discussed over the past several days, the banking stocks and ETFs, such as (RKH | Quote | Chart | News | PowerRating), have been acting great since breaking out to a new all-time high on April 27. However, the XBD index, which is comprised of securities broker-dealers such as Goldman Sachs, Merrill Lynch, and Charles Schwab, completely ignored the BKX breakout on April 27. On April 28, the Broker-Dealer Index fell 2.1% as the Banking Index gained another 1.9%. The downward momentum in the XBD really began picking up steam yesterday, as the index lost another 3.2%. More importantly, it closed below support of its 50-day moving average for the first time since October 18, 2005. As the daily chart below illustrates, the XBD had been in a steady uptrend for the past six months, but the index broke support of that uptrend yesterday:

What we have seen over the past few days is a normal pattern of institutional money flowing out of an "overbought" sector and into one that has lagged behind. As trend traders, our job is to constantly look for where the "big money" is flowing and simply trade in the same direction. Thanks to the advent of exchange traded funds, sector trading is usually quite simple because one only needs to purchase one security in order to have diversified exposure to a whole sector. As you know, the Regional Bank HOLDR (RKH) is probably the best bet for capturing anticipated gains in the Banking Index. The S&P Select Financial SPDR (XLF | Quote | Chart | News | PowerRating) is another viable choice, but it has lagged the Regional Bank HOLDR since the breakout. Unfortunately for those of you who wish to sell short the Broker-Dealer Index at the same time, there is not yet an ETF that specifically tracks the XBD. However, you may wish to make your own "synthetic ETF" by simultaneously trading a small basket of individual stocks that comprise the index. You can view the twelve underlying stocks that make up the XBD index by clicking here.

Taking an updated look at the major indices, the most notable thing that happened yesterday was the Nasdaq Composite's close below its 50-day moving average: