MARCH MADNESS HITS WALL STREET - KEY SECTORS LEAD ADVANCE SPX VOLUME REMAINS HIGH VIX BREAKS FEBRUARY LOW OIL BECOMES OVERBOUGHT FOR FIRST TIME SINCE JULY

SMALL-CAPS AND MID-CAPS LEAD ... For the second time in three days, stocks surged with a broad advance on good volume. All sectors were up and almost all industry groups were higher. Small-caps led the way as the Russell 2000 ETF (IWM) gained over 6%. Mid-caps were a distant second with the S&P 400 Midcap ETF (MDY) gaining over 4%. Chart 1 shows IWM moving back above its November low with a big gain today. Technically, the trend is still down because IWM forged a lower low in March. However, this rally looks strong and could extend to around 42-43. Resistance in this area is marked by broken support, the falling 50-day moving average and a 50% retracement of the January-March decline. Chart 2 shows the S&P 400 Midcap ETF with a successful test of the November low. In fact, a large double bottom could be taking shape here. The surge off the March low looks as strong as the November surge. The next resistance area for MDY resides around 89-90.

Chart 1

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ALL SECTORS PARTICIPATING... All sectors participated in the surge over the last three days. Chart 3 shows a Sector Market Carpet snapshot of the nine sectors in the S&P 500. Perhaps most importantly, the financial, consumer discretionary and technology sectors are showing upside leadership. There are 81 stocks in the financial sector and the average stock is up over 10%. The average stock in the consumer discretionary sector is up almost 7% and the average stock in the technology sector is up over 5.5%. These are the "offensive" sectors. Consumer discretionary stocks are the most sensitive to the economy. Financial stocks are the most sensitive to interest rates - and the most battered. Technology represents the high-beta stocks for risk-lovers. Relative strength in technology shows a healthy appetite for risk, which is bullish overall. The utilities, healthcare and consumer staples sectors were the least strong with the smallest gains. These three are traditionally defensive sectors that lag during a broad advance.

Chart 3

SPX VOLUME REMAINS STRONG... Chart 4 shows the S&P 500 with volume bars. I featured this chart on Wednesday and noted evidence of capitulation with a high volume decline in late February (yellow area). This capitulation was reversed with a surge on high volume over the last three days. SPX volume exceeded 7 billion shares on Tuesday's big gain. The index continued higher with a small gain on Wednesday and another big gain on Thursday (over 4%). More importantly, volume exceeded 6 billion shares on both days. With broad participation and strong volume, today's advance qualifies as strong follow through to Tuesday's advance. Short-covering and bargain hunting can trigger a one-day surge. A follow through surge signals new buying that is required for a sustainable advance. The first resistance target is around 800, which stems from broken support and the falling 50-day moving average.

Chart 4

VOLATILITY INDICES BREAK SUPPORT... Rising volatility is often associated with market weakness, while falling volatility is associated with market strength. Today was no exception. With the stock market surging higher, the S&P 500 Volatility Index ($VIX) and the Nasdaq Volatility Index ($VXN) both moved sharply lower. Chart 5 shows the VIX breaking below its 50-day moving average and below its late-February low. The five-week uptrend has been reversed. Chart 6 shows the Nasdaq Volatility Index breaking below the 200-day moving average and the late-February low as the Nasdaq turns up. Fear at the March lows was much less than fear at the November lows. With fear subsiding even further, the bulls are likely to become more confident.

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OIL SURGES AS DOLLAR DROPS... The United States Oil Fund ETF (USO) surged over 7% on Thursday. OPEC meets this weekend to consider its fourth supply cut since September. In addition, oil also benefited from weakness in the dollar and strength in the stock market. The S&P 500 is up over the last three days, while the dollar is down over the last three days. Chart 7 shows the U.S. Dollar Index ($USD) falling below 88. Despite this decline, the trend remains up with support around 86. Chart 8 shows that USO still has resistance around 28-30 to contend with. Even so, the current rally is the strongest since July. The bottom indicator shows the Commodity Channel Index (CCI) over the last nine months. This momentum oscillator became overbought for the first time since July. While overbought readings may warn against new longs for the short-term, overbought readings are also evidence of buying strength. Strong securities become overbought and weak securities become oversold.

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