REVIEW OF NBR CONSUMER STAPLE AND DRUG STOCK PICKS -- SHORT TERM OVERBOUGHT BUT LONGER TERM BULLISH
ABBOTT LABS IS SHORT-TERM OVERBOUGHT ... During my TV appearance on the Nightly Business Report last Friday evening, I gave five stock recommendations. All five were in the consumer staple and drug groups and had been shown here over the previous week. As I was mentioning the stocks, NBR showed the last 52-week charts for each of them. Paul Kangas (the host) asked if I was concerned about the fact that all had pretty good runups recently. My response was that they had -- and might be over-extended short term -- but looked reasonably priced on long term charts. That's what I'd like to explain here. Chart 1 shows Abbott Labs rising to a new 52-week high during December. Last week's spike came on especially strong volume. Its daily RSI, however, does show the stock to be overbought short-term (over 70). Not surprisingly, it's pulling back this week to initial support just above 45 which was its November peak. The weekly bars in Chart 2 show why I like the stock long-term. Last week's price action broke the stock out of a nearly two-year trading range which resembles a bullish "ascending triangle" (see converging trendlines). Its relative strength line is especially important. Because it shows that ABT is assuming market leadership for the first time in two years. The weekly chart shows major chart support just below 45. The message is to buy dips.
Chart 1
Chart 2
JOHNSON & JOHNSON IS ALSO OVERBOUGHT ... The daily bars in JNJ also show the stock to be on a short-term overbought condition. Its RSI line is giving a small "negative divergence" which hints that last week's runup was overdone. The weekly bars in Chart 4 also show that JNJ is challenging its early 2002 peak near 64. That's another reason to expect some short-term selling. Once again, it's the weekly RS line that I find most encouraging. The JNJ/S&P ratio is turning up for the first time since it peaked in October 2002. You may recall that's when the S&P 500 started to bottom. The recent upturn suggests that some defensive money is moving into JNJ. That's one of the reasons that I turned more positive on consumer staples and drugs during December. Yes, JNJ is over-extended and due for a pullback. But I like it's long-term chances. But it has to get through 64 eventually to make that bullish outlook a reality.
Chart 3
Chart 4
CONSUMER STAPLE LEADERS ... The next three daily charts show the three consumer staples leaders that I recommended. All three are in short-term overbought conditions as measured by their RSI lines being over 70. General Mills is also up against resistance at its spring high near 49. Sara Lee is showing a short-term "negative divergence" on its RSI line. All three charts leave room for short-term pullbacks or consolidations. Here again, it's the long-term charts that attract attention.
Chart 5
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Chart 7
LONG-TERM CHARTS LOOK PROMISING ... The next three charts show the long-term picture for the three consumer staples shown above. Campbell Soup has just reached a three-year high and is starting to show market leadership for the first time in four years. It looks cheap historically. The weekly bars for General Mills show the stock breaking through the upper line in a three-year "symmetrical triangle" (see converging trendlines). Its RS line is just starting to turn up as well. It peaked during the fourth quarter of 2002 as the market was bottoming (see arrows). The monthly bars for Sara Lee show the stock challenging its 2000 peak near 24. That resistance level may cause some short-term selling. But a close over that level (which I think is likely) would be a long-term bullish breakout. Yes, they all look over-extended short term but positive long term. Although we trade in the short term, we invest for the long term.
Chart 8
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Chart 10
BMY AND SGP DRUG UPDATES ... I didn't mention these two drug stocks on the NBR show, but maybe I should have. On Friday, as the drugs were being sold, I showed them both trying to hold above initial chart support at their September highs (see circles). So far those supports have held. Both still look good to me. And they're relatively cheap. To restate part of my reason for liking consumer staples and drugs, both are considered to be defensive in nature. They lag when the market is strong, and lead when it's weak. On a relative strength basis, both groups peaked during the fourth quarter of 2002 as the market bottomed. The fact that they're now showing some relative strength suggests to me that investors are starting to turn more defensive. That would also fit into my view that the cyclical bull market is nearing completion. If that's the case, consumer staples and drug stocks should start doing better. Having said that, it's also true that the recent slew of drug announcements have injected an unusual degree of risk into the large pharma stocks. The recent drops in Merck and Pfizer show that drug stocks aren't without risk.
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Chart 12
