FINANCIALS LEAD MARKET RALLY -- MARKET INDEXES EXCEED INITIAL RESISTANCE LEVELS -- LIGHTEN UP ON BEAR POSITIONS

FINANCIAL SPDR EXCEEDS 200-DAY LINE ... I've written several times recently that if the market were going to stage a rally, one of the groups that would lead it higher would be the financials. And that's what happened today. In a strong market day, financials were the day's top sector. Chart 1 shows the Financials Sector SPDR (XLF) moving back over its 50- and 200-day moving averages. The last time it climbed over both lines was back in early November. The financial relative strength line has also started to climb. It recently broke a two-month down trendline and is now trading at a two-month high. Most of today's big financial gainers were banks, brokers, and insurance stocks. Chart 2 shows Bank Regional Holders breaking through their 200-day average on rising volume.

Chart 1

Chart 2

BEARS STEARNS HELPS BROKERS REGAIN 200-DAY LINE ... Chart 3 shows Bear Stearns rallying back over its 200-day moving average. That helped the Broker/Dealer Index (XBD) regain its 200-day average as well. The recent fall by the XBD below the 200-day line raised market risk since brokers are considered to be leading market indicators. Today's move back over that long-term support line has removed some of that market risk.

Chart 3

Chart 4

DRUGS, REITS, AND DIVIDEND ETF ARE MARKET LEADERS... Scanning through the various group indexes, the next three jumped out because of their superior chart performance. The Pharmaceutical Index (DRG) continued its recent climb and hit a new 52-week high today (Chart 5). REITs continued to gain ground as well. Chart 6 shows the Morgan Stanley REIT Index (RMR) moving over its March high to the highest level in four months. Chart 7 shows the Dow Jones Dividend iShares (DVY) breaking through its April high and its 50-day moving average. Its relative strength line is trading at a new six-month high. Apparently, investors are opting for the relative safety of dividend paying stocks.

Chart 5

Chart 6

Chart 7

MARKET INDEXES CLEAR FIRST HURDLES ... Each of the three main stock index ETFs broke through initial chart barriers today. Chart 9 shows the Dow Diamonds (DIA) closing over their 200-day average, a two-month down trendline, and the January low at 103.15. That paves the way for a possible test of its 50-day moving average and more chart resistance just over 105. Chart 9 shows similar improvement in the S&P 500 SPDRs (SPY). The SPY closed over initial chart resistance at 116.77 and is nearing a test of its 50-day line near 118. The daily MACD lines have turned positive. The Nasdaq 100 Shares (QQQQ) are well below their moving average lines, but did close above initial resistance at 35.71. The lines below the QQQQ chart show an improving short-term trend. The +Directional Index (+DI) line (green) is rising, while the -Directional Index (-DI) line (red) is falling. They haven't crossed positive yet, but they're converging. That's confirmed by the fact that the Average Directional (ADX) line is starting to drop (black line). That's usually a sign that the current downtrend may be changing direction. That's not enough to turn the chart bullish. But it is enough to suggest some short-covering.

Chart 8

Chart 9

Chart 10

EXITING BEAR POSITIONS ... Last Friday (and again on Monday) I suggested that those on the short side of stock index ETFs could place protective buy stops over last week's price highs. Those highs have now been exceeded which warrants some short-covering of existing bear positions. With virtually all of the market indexes back over their 200-day moving averages, and positive short-term market action, the imminent threat of a market breakdown has been neutralized for now. That's enough, in my opinion, to reduce short positions. The same is true for those traders who bought bear market funds. I'd suggest lightening up on those as well. While I'm not recommending new long positions at this point, anyone looking to commit money to the market should consider new market leaders -- like some of those groups shown above.