Resistance Ahead? Bumping Up Against 2007 Highs

by: Zecco

If you’ve been watching long-term charts of some of the major indexes and averages, you might have noticed that some of them are actually getting close to their 2007 highs, while others are still lagging.

So, as the year draws to a close, I thought I’d look back over the past ten years or so to see where some of these indexes stand against that pre-crash benchmark.

For example, here are monthly charts of the Dow Jones Industrial Average, S&P 500 index, and NASDAQ 100 index:

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As you can see, while both the S&P 500 and DJIA are well below their 2007 highs, the NASDAQ 100 needs to gain just 47 points (about 2%) to reach that milestone. It’s worth noting, of course, that the NASDAQ 100 is nowhere close to its all-time high of about 4,500, a record set before the dot-com bubble collapsed in 2000.

One reason why the NASDAQ 100 has outperformed the S&P 500 since 2007 could be the growth in shares of Apple (NASDAQ:AAPL). The stock closed on December 3 at 317.44, more than 50% above its 2007 high of about $202.

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Russell 3000: Growth vs. value

The Russell 3000 index represents the largest 3000 US-traded stocks, a broader-based index than the S&P 500.

Russell also divides the companies in this asset class into two sub-indexes, the Russell 3000 Growth Index and Russell 3000 Value Index. The companies Russell selects as growth stocks tend to have higher price-to-book ratios than those selected as value stocks.

Here’s a look at the main Russell 3000 index and these two sub-indexes:

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What’s interesting is that while both sub-indexes plunged during the financial crisis, the growth index is much closer to its 2007 high than the value index. But like the NASDAQ 100, the Russell Growth Index is still well below levels set before that tech bubble burst.

Looking beyond Large Cap

While the S&P 500 index is a widely followed large cap index, S&P also tracks mid-cap and small-cap companies.

A look at the S&P 500 Large Cap, S&P 400 Mid Cap, and S&P 600 Small Cap indices shows that the small- and mid-cap companies represented in those indices are closer to their 2007 highs than their large-cap peers. And the smaller companies are well above the highs they set in the early 2000s.

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Remember, of course, that over the long-term, these indices don’t necessarily reflect the performance of the exact same stocks. As a company’s market cap changes, it might be moved from one index into another – or even be removed from the total 1500-stock universe entirely.

Sectors: Specific industry performance

The S&P 500 itself is divided into several broad industry sectors. I’m not going to show charts of all of them, but here are two of those sector-based indices – consumer staples and financials – that seem to show a striking comparison.

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Financials, as we know all too well, led the deep sell off three years ago and are far closer to their 10-year lows than their highs, but the consumer staples sector index seems to be closing in on a new 10-year high.

Key resistance points ahead?
What do the 2007 highs for the major averages and indices mean? Technical analysts will likely view them as significant resistance points. One rationale is that a major multi-year high represents a level where some investors might feel they’re “back to even” and start selling.

That, of course, could be a self-fulfilling prophecy. At levels where many traders expect a sell-off, that’s what you often get. Whether that’s logical or not doesn’t matter – and it’s possible these indices may not even get a chance to test those resistance points any time soon.

But even if the broad indices do rise and run into resistance, we might see some of the more specific industry and asset-class sectors actually exceed their 2007 highs.

Oh, and let’s not forget that the investable universe certainly isn’t confined the U.S, but I’ll save an overview of some of those international indices for a future post.