Stocks got off to a scary start yesterday morning, as several of the major indices dipped below their prior closing lows from July, but an impressive bullish reversal day enabled the broad market to finish significantly higher. The S&P 500 and Nasdaq Composite started the day with matching losses of 1.7%, but the bulls bought into weakness for a change, causing the indices to rally 3% off their intraday lows to close higher by 1.4% and 1.3% respectively. The blue-chip Dow Jones Industrial Average fared best with its 1.5% gain, but small and mid-caps lagged behind. The Russell 2000 gained just 0.3%, as the S&P Midcap 400 advanced 0.5%. All the main stock market indexes closed at their best levels of the day.

Total volume in the NYSE ticked 3% higher, while volume in the Nasdaq edged 1% above the previous day's level. Though turnover was only marginally greater, both the S&P 500 and Nasdaq Composite technically registered bullish "accumulation days." The intraday price action that enabled the major indices to reverse early losses to substantial gains confirmed the presence of institutional buying. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a margin of 2 to 1. Considering the adv/dec volume ratios were negative by 10 to 1 early in the morning, the volume spread by the closing bell was pretty good. On September 8, when the S&P 500 closed more than 2% higher, recall the adv/dec volume ratio in the NYSE was positive by only 3 to 2.

For the first time this month, we saw some positive signs in yesterday's market action. Although the S&P 500 and Dow Jones Industrial Average gained a greater percentage during the September 8 rally, yesterday's buying was not primarily limited to the financial sectors. This time, the Nasdaq kept pace with the other indexes. Further, we actually saw a handful of individual stocks breaking out to new 52-week highs yesterday. This differs greatly from the September 8 rally, in which the biggest gaining stocks were merely bouncing off their lows.

After observing the complete rebound in the S&P 500, we made a judgment call to sell our position in the UltraShort Basic Materials ProShares (SMN). Though the basic materials sector continued to show relative weakness to the broad market, we didn't want to get into a situation where we risk giving all our profits back if the market forms a short-term bottom from here. So, rather than holding out for original price target, a few points higher than the previous day's close, we sold SMN for a gain of 8% since our September 5 entry. Upon seeing confirmation the bullish reversal was likely to hold, we sent an Intraday Trade Alert to subscribers, and initiated a new long position in iShares Nasdaq Biotech (IBB).