After shaking out the bulls in the beginning of this low-volume week, the bears got a bit of payback into the end of the week. Positive economic data in the pre-market sparked a higher open in the broad market yesterday, where stocks subsequently built on their opening gains. The Dow Jones Industrial Average jumped 1.9%, the S&P 500 1.5%, and the Nasdaq Composite 1.2%. Small-caps led the way for a second straight day, as the Russell 2000 climbed 2.0%. The S&P Midcap 400 was higher by 1.6%. All the main stock market indexes closed at their intraday highs for a change.

Total volume in the NYSE ticked 12% higher, while volume in the Nasdaq rose 2% above the previous day's level. It was the Nasdaq's second consecutive day of higher volume gains, albeit barely. Although turnover in the NYSE increased substantially, volume still remained below average levels. But despite the thin trading, market breadth was quite solid. In both exchanges, advancing volume exceeded declining volume by a margin of more than 4 to 1.

On the surface, yesterday's session may have seemed quite bullish, but a closer look reveals some interesting observations. While firmly positive market internals told us yesterday's buying was broad-based among most industry sectors, there was a notable lack of leadership among top sectors and individual stocks. Biotechnology and medical stocks, the leading sectors for the past two months, failed to keep pace with the gains of the broad market. The S&P Healthcare Index ($HCX), for example, only gained 0.9%. In healthy markets, the top stocks in industry sectors with the most relative strength will substantially outperform the gains of the major indices on broad-based "up" days. Instead, leading biotech and medical stocks, such as Celgene (CELG), Genzyme (GENZ), and Intuitive Surgical (ISRG), lagged behind the major indices yesterday.

Rather than the biotech and medical sectors leading the way, the largest gaining sectors yesterday were those that have already been beaten down badly, and were merely bouncing off their lows. The KBW Bank Index ($BKX) rallied 4.5%, the Amex Securities Broker/Dealer Index ($XBD) gained 4.0%, and the S&P Insurance Index ($IUX) advanced 3.5%. Whoopee! Is the lambasted financial sector going to lead us out of the current bear market? Highly unlikely. Broad-based rallies in the stock market simply can not be sustained for long when they are only led by the weakest of all industry sectors.

It's positive that the S&P 500 and Dow Jones Industrial Average broke out above the highs of their recent trading ranges we illustrated in yesterday's commentary. However, the Nasdaq Composite closed right at resistance of its 200-day moving average. Recently, on August 22, the "brick wall" resistance of the 200-day MA put the brakes on the Nasdaq's rally attempt. It could easily do the same again. Similarly, it's noteworthy to realize the large-cap Nasdaq 100 Index only managed to gain 0.8% yesterday, approximately half of the advances in the S&P and Dow.

After the close of trading, computer giant Dell, Inc. (DELL) announced a drop in net earnings of their latest quarterly results. The news sent the stock 10% lower in after-hours trading, and significantly dragged down the Nasdaq 100 futures as well. As of early this morning, the Nasdaq is now positioned to open right at yesterday's low. If it does, and fails to immediately reverse higher to fill the gap, the last trading day of the month could be very interesting. We stand by our original assessment that we won't see the real direction of the stock market's next move until after the Labor Day holiday.

NOTE: The U.S. stock markets will be closed on Monday, September 1, in celebration of the Labor Day holiday. As such, The Wagner Daily will not be published that day. Regular publication will resume on Tuesday, September 2. Enjoy the three-day weekend!

Open ETF positions:

Long - TAN, IYH
Short - (none)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and Morpheus Trading Group, a trader education firm launched in 2001 that provides daily technical analysis of the leading ETFs and stocks. For a free trial to the full version of The Wagner Daily or to learn about Wagner's other services, visit MorpheusTrading.com or send an e-mail to deron@morpheustrading.com.