Are you long gold? Read this…

Stocks recovered from their morning
losses Wednesday afternoon, but the rally lacked the power and
breadth that is normally associated with bullish reversal days. The Nasdaq
Composite
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PowerRating), down 0.9% at its mid-day low, reversed to finish the
session less than 0.1% lower. Both the S&P 500
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Industrial Average
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0.2% gains. The small-cap Russell 2000 and S&P Midcap 400 indices each managed a
0.1% advance. Our SPY short position hit its trailing stop when it rallied above
the morning high, but we still locked in a gain of approximately one point.

Total volume in the NYSE increased by 6%, while volume in the
Nasdaq was 10% higher than the previous day’s level. The gains on higher volume
technically caused the S&P to register a bullish “accumulation day,” but calling
it as such is a bit deceiving. The one major problem with yesterday’s broad
market volume pattern is that turnover actually decreased when the broad
market began to rally in the afternoon. When the major indices were near their
intraday lows at 12 noon, volume in the NYSE was 11% higher than the prior day
at the same time. Then, as stocks began to rally, volume actually declined,
causing total volume to rise only 6% by day’s end. In the Nasdaq, volume was 14%
higher at its mid-day low, then eased up until turnover finished only 10% higher
than the previous day. So even though higher volume matched the S&P and Dow’s
gains, a closer look shows that volume during the morning selloff was higher
than it was in the afternoon rally. Obviously, this is not a positive for the
markets. Mediocre market internals confirmed the lack of power in the afternoon
reversal. In the NYSE, advancing volume roughly equaled declining volume, while
the ratio was slightly negative in the Nasdaq.

In addition to a lack of power in the volume department, many
leading stocks continued to fall further, despite the reversal attempt in the
broad market. The Biotech Index
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were among the bright spots in yesterday’s sector performance, but the formerly
strong Semiconductor Index
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PowerRating) shed another 0.6%. As we recently warned
of, GLD (Gold Trust) gapped down and sold off below support of its five-month
uptrend line and 50-day moving average yesterday:

So far, a “lower high” has been established in GLD, but we do
not yet have a “lower low.” Therefore, we do not advise shorting GLD, but
only point this out as a heads-up that you should probably be out of GLD by now.
If you still feel gold is going higher, no problem. Just wait for GLD to form a
base of support and then buy the first breakout above the range of the
consolidation. Managing it this way is much safer than waiting and hoping it
will recover soon. It also frees up capital that you can put to work in other
issues.

Yesterday’s action was typical of how the major indices
usually act near key pivot points in the market. Because the S&P 500 had closed
the previous day right at its 50-day moving average, we saw a bit of fear that
resulted in a rapid drop when it looked like the index was not going to hold
above its 50-day moving average yesterday morning. However, the bulls were
waiting for that typical probe below the 50-day moving average so that they
could place their buy orders and run up the market in the afternoon. But the
only problem is that there was not much pressure behind the afternoon buying.
Nevertheless, the S&P 500 managed to bounce off and close above its 50-day
moving average yesterday. Unfortunately, the market-leading S&P Midcap 400 Index
remains below both its 50-day moving average and new resistance of its prior
uptrend line that it fell below on March 7:

It is this relative weakness in the mid-cap, as well as the
small-caps, that we feel will continue to be a major drag on the broad market.
As discussed yesterday, we view the bounce in MDY (S&P Midcap 400) as an
opportunity to sell short into strength. Only a recovery back above the March 7
high changes that view. Conversely, the Dow continues to show the most relative
strength, but it is always a better bet to follow the path of least resistance
which, for now, appears to be lower.