Upward momentum from the Dow's
breakout to a new record high propelled the index firmly higher yesterday,
but this time the Nasdaq, small caps, and mid caps joined the party as well. The
S&P 500 gained 1.2% and the Dow Jones Industrial Average rallied 1.1%, but two
of the most important indices, the Nasdaq Composite and the small-cap Russell
2000, both surged 2.1%. The S&P Midcap 400 similarly turned in an impressive
1.6% gain. The Nasdaq registered its largest percentage gain since June 29, and
it also closed at its highest price since May 10. The tech-heavy index is now
only 3.4% below its 52-week high. Unlike the indecisive trading sessions we have
seen lately, yesterday saw stocks trend steadily higher throughout the entire
session. Each of the major indices closed at their intraday highs, a sign of
confidence and backing from institutional investors.

Turnover rose healthily across the board, causing both the S&P
and Nasdaq to clearly notch another bullish "accumulation day." Total volume in
the NYSE increased by 10%, while volume in the Nasdaq was 12% higher than the
previous day's level. It was the second straight day of buying by mutual,
pension, and hedge funds, and this time the broad market did not need to make up
ground from morning losses. Market internals were also strong. In the Nasdaq,
advancing volume exceeded declining volume by a margin of 4 to 1. The NYSE ratio
was positive by nearly 9 to 2.

Of the 313 ETFs we presently track on a daily basis, exactly
fifty of them finished at new 52-week highs yesterday. Granted, some of them are
different fund families that track the same sector, but the advent of so many
new highs is certainly a change from just a few weeks ago when hardly any ETFs
were sitting at their highs. A plethora of exchange traded funds from the
Software, Financials, Real Estate, Consumer Discretionary, and Telecom sectors
all finished at fresh 52-week highs. Consult the free
Morpheus
ETF Roundup for a list of all the corresponding ticker symbols. Numerous
international ETFs did as well. The iShares Xinhua China 25 Index ( FXI | Quote | Chart | News | PowerRating)
closed just a point below its high, but it finished above the high of its recent
consolidation that we illustrated yesterday:

Of all the international ETFs, we feel FXI has one of the best
looking chart patterns for long entry. Not only is it trading near its high, but
its consolidation has been more extensive and defined than many other
international ETFs. The longer a stock or ETF consolidates in a tight, sideways
range, the more likely the subsequent breakout will hold up when it eventually
occurs. FXI broke out above its consolidation yesterday, so we would consider
taking a position into today's close if it holds above the new support of the
$82.10 level. In this case, a breakout above the consolidation is more important
than waiting for the 52-week high, as there were only a few days of price
resistance above the current level. Waiting a day for confirmation of a breakout
before buying a new position is never a bad idea. You may pay a little bit more,
but there is a much higher chance of a profitable trade by first requiring price
confirmation before buying.

The most notable thing about yesterday's action was the
breadth. Every one of the more than twenty industry sectors we track finished in
positive territory. Frankly, we don't remember the last time that happened.
Unfortunately for the bulls, most of the stock market's "up" days in recent
months have lacked essential leadership by the Nasdaq, Russell, and S&P Midcap
indices, but yesterday's rally was quite broad-based and each of those three
indexes showed relative strength for a change. As discussed in yesterday's
newsletter, it is crucial that the Nasdaq "catches up" to the fresh 52-week
highs in both the S&P and Dow. If the relative strength in the Nasdaq and
Russell continues, we will feel much more confident about the prospects of
continued strength in the broad market.

Open ETF positions:



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