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 (PPH):

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.

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and Morpheus Trading Group, a trader education firm launched in 2001 that provides daily technical analysis of the leading ETFs and stocks.  For a free trial to the full version of The Wagner Daily or to learn about Wagner's other services, visit MorpheusTrading.com or send an e-mail to deron@morpheustrading.com.