Selling short the Regional Bank HOLDR (RKH)

Stocks extended their winning streak to four straight sessions yesterday, as the S&P 500 and Nasdaq Composite set new closing highs for 2009. However, an afternoon pullback in the broad market caused the Dow to nearly test its morning low, then bounce back up in the final thirty minutes of trading. The Nasdaq Composite gained 1.1%, the S&P 500 0.8%, and the Dow Jones Industrial Average 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices jumped 1.7% and 1.4% respectively. Finishing below their best levels of the session, the main stock market indexes settled around the upper quarter of their intraday ranges.

Turnover was mixed. Total volume in the NYSE declined 6%, but volume in the Nasdaq surged 24% above the previous day's level. In both exchanges, turnover moved back above 50-day average levels, indicating the return of substantial institutional participation. The Nasdaq, which began showing relative strength last week, logged a bullish "accumulation day" with yesterday's higher volume gain. In the Nasdaq, advancing volume exceeded declining volume by a solid margin of nearly 4 to 1. The NYSE adv/dec volume ratio was positive by a respectable ratio of 2 to 1.

Recently, we've been discussing the subtle rotation out of the financial sectors and into the tech sectors. Yesterday, we took action with a new trade intended to capitalize on the relative weakness in financials. Specifically, we initiated a short position in the Regional Bank HOLDR (RKH). The daily chart of RKH is shown below:

While the S&P 500 finished at a new closing high of the year yesterday, RKH is still 2% below its 2009 closing high. Although it has gained alongside of the broad market over the past four days, RKH is still showing relative weakness by lagging the broad market. On the "percentage change chart" below, benchmark S&P 500 has gained 1% over the past two weeks, while RKH has lost 1.9%. It is also more clearly apparent that the S&P 500 has rallied back to its late August highs, but RKH is still well below its prior highs:

With a plethora of overhead supply to contend with, from its August band of price consolidation, RKH is likely to have trouble moving higher in the short-term. Furthermore, if the main stock market indexes take a rest within the next day or two, RKH could be one of the first ETFs to slide lower, as well as exceed the losses of the broad market. This is because stocks and ETFs with relative weakness are typically the first to plunge lower when the broad market reverses lower. They are also the last to climb when the overall stock market is moving higher.

In yesterday's commentary, we briefly mentioned the potential "head and shoulders" pattern in that was forming on the daily chart of the S&P 500. With the index finishing above its prior closing highs from late August, the odds of that pattern following through to the downside are now significantly diminished. Nevertheless, the "head and shoulders" pattern is technically still valid, as the S&P 500 remains below the intraday highs form late August (the "head" on the pattern). Furthermore, yesterday's performance in the laggard Dow Jones Industrial Average failed to confirm the S&P 500's rally to a new closing high. If any of the major indices are to head back down to test their "swing lows," the Dow is likely to lead the way lower. Conversely, continued bullishness in the market would likely favor the tech-heavy Nasdaq Composite the most. The Nasdaq and S&P Midcap 400 indices are the only main stock market indexes now trading above their closing and intraday highs from late August, albeit not by a wide margin.