Stocks followed up Tuesday's sell-off with a rather tepid response. The major indices bobbed and weaved on both sides of the flat line before settling near unchanged levels. The Dow Jones Industrial Average eked out a gain of less than 0.1%, the S&P 500 lost 0.1%, and the Nasdaq Composite declined 0.2%. Small and mid-cap stocks exhibited relative weakness; the Russell 2000 and S&P Midcap 400 indices fell 1.3% and 1.2% respectively. Most of the main stock market indexes finished near the middle of their intraday ranges, indicating indecision into the close.

Total volume in the NYSE declined 10% below the previous day's level, while volume in the Nasdaq receded 11%. It was a quiet day overall, but turnover in both exchanges still exceeded 50-day average levels. Market internals were negative, but only by a small margin. In the NYSE, declining volume beat advancing volume by 2 to 1. The Nasdaq adv/dec volume ratio was only fractionally negative.

Aside from the strength in precious metals, one of the few industry sectors showing relative strength is healthcare. Though the major indices recently broke support of their intermediate-term uptrend lines, several healthcare ETFs continue to show bullish divergence. So far this month, the S&P 500 is showing a loss of 4.1%. Comparatively, iShares U.S. Healthcare (IYH) is down less than 0.1%. Even better is the month-to-date 0.9% gain in iShares Nasdaq Biotech (IBB), which we've been long since Februrary 3. The "percentage change chart" below clearly illustrates the relative strength these ETFs have been showing to the broad market:



Throughout the first ten days of the month, the two healthcare ETFs were roughly following the direction of the S&P 500. However, as the broad market sold off over the past week, the bullish divergence (relative strength) became more apparent. Because the healthcare sector has held firm in the face of broad-based weakness, we should expect the sector to outperform the gains of the S&P 500 whenever stocks eventually bounce. Further, the daily charts of both IYH and IBB remain healthy:





The February 17 sell-off in the broad market caused the major indices to technically break support of their intermediate-term uptrend lines. However, our overall bias remains neutral to only slightly bearish, as the Dow is still holding support of its November 2008 low. With all the bad news flying around, as well as an unenthusiastic reception to Obama's mortgage rescue plan announced yesterday, one might assume stocks would already be making another leg down, below their November 2008 lows -- but they have not. With the main stock market indexes below support of their multi-month uptrend lines, but still holding their November 2008 lows, a neutral bias simply makes sense. This means a dominant cash position is a good bet for now, until the market shows its hand.

Open ETF positions:

Long - IBB, EWZ
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.