This ETF broke out on huge volume yesterday

Support from the October 2005 low that we
illustrated in yesterday morning’s newsletter sparked a 2.1% gain in the Nasdaq,
but significantly lower overall volume showed that most of the buying was driven
by retail investors and traders. Both the small-cap Russell 2000 and S&P Midcap
400 indices also perked up, registering gains of 2.8% and 2.2% respectively. The
S&P 500 and Dow Jones Industrial Average both kept pace as well, as each index
closed 1.7% higher. At mid-day, the Nasdaq reversed pretty sharply from its
morning gain, but the index recovered into the close and finished near its
intraday high. The other major indices followed a similar intraday pattern, but
showed more relative strength during the intraday correction.

Looking solely at price action, yesterday’s rally looked pretty solid, but one
major problem is that turnover declined by a substantial percentage in both
exchanges. Total volume in both the NYSE and Nasdaq was 18% lower than the
previous day’s level. Granted, the monthly expiration of options contracts last
Friday accounted for a bit of that day’s rise in volume, but only by a nominal
amount. The fact that 18% less shares traded hands on a day when the major
indices were each up approximately 2% is not a good sign for the bulls. When the
stock market is trying to recover from an extended period of losses, higher
volume on the up days is crucial for confirmation that it is safe to get back in
the water. Conversely, a big day of gains on such lighter volume shows that
institutions, who account for more than half of the market’s average daily
volume, were not confident enough to get behind the buying activity. Until that
occurs, big “up” days are unlikely to hold.

While the technology-related sectors have been getting killed, one sector has
been stealthily moving higher. The Pharmaceutical Index (DRG), which has been
dormant for ages, surged 2.3% and closed at a new 52-week high yesterday. The
more “aggressive” stocks in the Biotech Index lagged, but big, old-school drug
companies such as Bristol-Meyers Squibb, Pfizer, and Merck broke out of lengthy
bases of consolidation yesterday. To illustrate this action, take a look at the
daily chart of the Pharmaceutical HOLDR
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Not only did PPH break out of a base and jump
2.6% higher yesterday, but it did so on more than 400% of its average daily
volume! The volume surge is quite important because it confirms the price
action. Even though volume declined in the broad market overall, mutual funds,
hedge funds, and other institutions were clearly buying shares of PPH.
Traditional “old economy” pharmaceutical companies tend to rise when the more
aggressive growth companies are dropping, and vice versa. This was a clear
example of institutional sector rotation and we expect higher prices in PPH in
the coming days. In tomorrow’s newsletter, we will take a look at the Utilities
sector, which also has been slowly creeping higher over the past few weeks.

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Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of
Morpheus Trading Group (,
which he launched in 2001. Wagner appears on his best-selling video, Sector
Trading Strategies (Marketplace Books, June 2002), and is co-author of both The
Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader
(McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and
Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and
financial conferences around the world. For a free trial to the full version of
The Wagner Daily or to learn about Deron’s other services, visit or send an e-mail