Here’s a great way to spot relative strength or weakness

Stocks attempted to build on the
gains of the previous two days, but the buying interest dried up in
the afternoon, causing the major indices to drift back down to near the flat
line. The S&P 500, Dow Jones Industrial Average, and the S&P Midcap 400 indices
each finished less than 0.1% lower, while the Nasdaq Composite slipped 0.2%.
Small cap stocks showed the most relative weakness, as the Russell 2000 Index
lost 0.4%. Each of the major indices closed near the middle of their intraday
ranges, indicating indecision into the close.

Total volume in the NYSE increased by 4%, while volume in the
Nasdaq
(
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PowerRating) was 7% higher than the previous day’s level. Technically, the
broad market experienced a bearish “distribution day” because the major indices
closed lower on higher volume. However, the volume increase was minimal and the
losses in the broad market were insignificant, so it would be a bit misleading
to say there was a lot of institutional selling taking place. The fact that
market internals actually closed slightly positive confirms this thought. In
both the NYSE and Nasdaq, advancing volume marginally exceeded declining volume
levels.

As for the major industry sectors, yesterday was pretty mixed.
On the upside, the oil and gold commodities were strong. The Oil Service Index
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OSX |
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PowerRating)
and Amex Oil Index
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PowerRating) gained 2.7% and 1.7% respectively. The Gold and
Silver Index
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the daily charts of both the $OSX and $XOI indexes, you will notice an
interesting price divergence has been taking place. While the $OSX remains 14%
below its 52-week high, the $XOI index actually closed at a fresh all-time high
yesterday. This tells us that money has been flowing into the oil refiners and
producers more than the oil service stocks. To illustrate this, take a look at
the daily percentage change chart below that overlays the $OSX with the $XOI and
notice the price divergence since the June 13 lows:

Overlay charts that illustrate the differences in percentage
change are a great way to quickly spot relative strength or weakness within
specific industry sectors. Upon spotting the relative strength or weakness, you
can use the

ETF Roundup guide
to make sure you are positioned long in the sectors with the most relative
strength or short those with relative weakness to the broad market. In this
situation, for example, we would know that it is a much better bet to be long
the PowerShares Energy Exploration Fund (PXE) rather than the more well-known
Oil Service HOLDR (OIH). Spotting relative strength between industry sectors is
one of the main topics that will be covered in our series of

live training seminars that kick off next week in San Francisco.

In addition to the solid gains in the oil and gold sectors,
both the Utilities
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DJU |
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PowerRating) and Pharmaceuticals
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PowerRating) continued to act
well. Both sectors gained only 0.5% yesterday, but they continued to build on
their recent gains. The $DRG index closed at a new 52-week high for the third
consecutive day, while the $DJU has closed higher for the ninth day in a
row. As we discussed over the past several days, both sectors are acting great
and we like the idea of buying their respective ETFs on the first decent
pullback. The Utilities HOLDR
(
UTH |
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PowerRating) and the Pharmaceuticals HOLDR
(
PPH |
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PowerRating)
are the most popular ETFs in those sectors. We are presently stalking both of
them for potential long entries if we see low-risk entry points. Given that the
broad market is still in a confirmed downtrend, we’re definitely not interested
in chasing any long positions that are extended.

On the downside, the DJ Transportation Average ($DJT)
continued to show relative weakness by falling 2.8% yesterday. The drop caused
the iShares DJ Transportation Average (IYT) to close below its 200-day moving
average for the first time since October 18, 2005. We mentioned last week that
we were beginning to see relative weakness in the transportation stocks and this
has now been confirmed. Looking at the daily chart of IYT below, notice how it
not only closed below its 200-day moving average, but has had numerous days of
high volume losses over the past three weeks as well:

Given the overall weak market environment and the relative
weakness in IYT, we like the idea of selling short the transportation stocks and
ETFs into the next bounce. One could also consider selling short the break of
the 200-day moving average support level, but it is always higher risk to short
a breakdown rather than waiting for the first bounce after the break of
support.

The bigger picture of the broad market remains bearish in the
intermediate-term. Since putting in a short-term bottom on July 18, the major
indices have attempted to rally, but tech sectors such as the Semiconductors
remain dead. With techs so weak, it is unlikely the Nasdaq will rally, which
makes it difficult for the other indices to sustain any gains as well. If the
S&P 500 can break out above its July 3 high of 1,280, our bias would become more
positive, but the index technically remains in a primary downtrend until that
happens. Most key companies that have reported quarterly earnings over the past
two weeks have seen negative price reactions in their stocks the following day.
Clearly, this doesn’t help the situation either. We are not bearish on the
market simply to be different or to try to be right. Rather, we are merely
following the primary trends. It’s a corny and overused Wall Street expression,
but the trend really is your friend! Don’t fight it and you will always
be rewarded in the long-term.

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