S&P 500 Closing In On Its Historical High

NOTE: Please click on the charts below to enlarge them if they do not appear clearly.

After spending most of the day in a narrow, sideways range, the major indices briefly rallied to new highs in the afternoon, but selling pressure in the final thirty minutes caused stocks to finish with mixed results. The Nasdaq Composite gained 0.3% and the Dow Jones Industrial Average edged 0.1% higher, but the S&P 500 drifted 0.1% lower. Both the small-cap Russell 2000 and S&P Midcap 400 indices advanced 0.2%. Strength in Internets and Semiconductors helped the more concentrated Nasdaq 100 Index to outperform for the second straight day by gaining 0.4%. The S&P 500, Nasdaq, and Dow all closed near the middle of their intraday ranges.

Turnover was also mixed. Total volume in the NYSE was 1% higher than the previous day's level, while volume in the Nasdaq declined by 9%. Although volume levels were little changed from the previous day, volume in the Nasdaq has exceeded its 50-day average level in six of the past seven days. Institutional interest in the NYSE has been more subdued. Over the past five weeks, the NYSE has only had two sessions in which volume rose above average levels. As for market internals, declining volume in the NYSE fractionally exceeded advancing volume. The Nasdaq ratio was positive by just 1.2 to 1. Yesterday's mixed volume readings were not very enlightening.

The financial media has been gaga over the Dow vaulting to a new high and over the 13,000 level, but there has been little discussion of how stealthily the S&P 500 has rallied to within striking distance of its all-time high as well. The index closed yesterday only 33 points (2.2%) below its historical closing high of 1,527, registered on March 24, 2000. This is illustrated on the monthly chart of the S&P below:

Given the close proximity of the S&P to its record high, it's plausible to think that traders will attempt to make a run at that high before seeing a significant correction. There are undoubtedly a lot of buy stops in that area and the temptation for institutions to run those stops is too great. Though the S&P is only two percent off its historical closing high, the Nasdaq Composite is another story.

Thanks to the insanity of the late dot com boom, the Nasdaq's all-time high is still in nose-bleed territory! Its record closing high of 5,048 was set on March 10, 2000. Based on yesterday's closing price of 2,554, the index remains a prodigious 98% below its historical high. Many of us will be lucky to live long enough to see the Nasdaq climb back over the 5,000 level! As you can see by the Fibonacci retracement lines on the chart below, the Nasdaq has recovered only about one-third of the loss from its May 2000 high down to its October 2002 low:

Yesterday's action did not change the current technical state of the markets. It was just a consolidation day typical of those that follow strong sessions in uptrending markets. As the bulls continue to snort, either ride the wave of momentum, keeping protective stops in place, or sit patiently on the sidelines in anticipation of at least a modest correction that will enable lower risk entry points in new long positions. If buying new positions at current levels, be sure they are within industry sectors that are showing relative strength to the broad market. In the event of a sudden correction, sectors with relative strength should retrace less than those that are merely keeping pace with the major indices. If cash is your preference, it is unlikely you will miss many more upside opportunities before seeing either a correction by time, such as a multi-week consolidation, or a pullback down to support of the 20-day moving averages.

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Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), 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 morpheustrading.com or send an e-mail to deron@morpheustrading.com .

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