HEALTHCARE INVESTORS ARE THE ONLY ONES FEELING GOOD -- MARKET AVERAGES BREAK DOWN -- VIX BREAKS OUT -- NEXT DOWNSIDE TARGET IS AUGUST LOW
HEALTHCARE INVESTORS SHOULD BE FEELING BETTER... While the rest of the market broke down this week, the only sector to end up in the black was healthcare. Chart 1 shows the Health Care SPDR (XLV) ending the week at a new recovery high. Its rising relative strength line also shows its superior performance over the last month. [The two other defensive sectors that held up relative well during the week were consumer staples and utilities]. Most of the healthcare gains came from the drug group. Chart 2 shows the AMEX Pharmaceutical (DRG) Index continuing to hit a new 2005 recovery high following a bullish breakout earlier in the week. It's relative strength line is also rising. Virtually all of the big pharmas scored big gains during the week. Abbott Labs surged to another 52-week high on Friday on very heavy volume (Chart 3). On Wednesday Lilly was just starting to rise on big volume. By week's end, LLY had become a drug star. Its daily chart shows the stock trading over its 200-day average earlier in the day on huge volume. (It closed just below it). And that was happening while the rest of the market was in a state of collapse. That's pretty good defensive action.
Chart 1
Chart 2
Chart 3
Chart 4
VOLATILITY INDEX BREAKS OUT ... Earlier today I showed a number of bear mutual funds breaking through their January highs to score upside breakouts. In early April I observed that bear funds weren't the only contrary indicators that were challenging their January highs. So was the Volatility (VIX) Index (April 04, 2005). I've written several stories since January on the fact that the VIX appeared to be turning higher which would be a bearish sign for the market. That's because the VIX and the market trend in opposite directions. Chart 5 shows the VIX soaring on Friday to the highest level in five months. That's just another confirmation that the market has peaked. Chart 6 compares the VIX (purple line) to the S&P 500 (red line) for the last three years. The cyclical bull market started with a peak in the VIX. That bull market ended with a VIX bottom.
Chart 5
Chart 6
HOW FAR DOWN? ... After this week's breakdown, there can be little doubt that the cyclical bull market that started in October 2002 has ended. The question now is how far down can the market drop. The daily bars in Chart 7 show the S&P 500 SPDR breaking its January low and closing beneath its 200-day moving average. Downside volume was very heavy. There's a support level at 108.60 at its late October low. But I think the S&P (and the other major stock averages) are headed all the way back to its August low. That's based partially on standard chart analysis, and partially on Elliott Wave Theory. Chart 7 shows that the rally off the August low took place in five waves. The breaking of the bottom of wave 4 (the January low) confirmed that the rally ended. But there's another Wave 4 to consider.
Chart 7
MARKET SHOULD DROP TO BOTTOM OF WAVE FOUR... The weekly bars in Chart 8 show that the cyclical bull market that started in October 2002 has also taken place in five waves (I've shown this pattern several times before). The fact that the rally off the August low was the fifth and final upwave was one of the reasons that I suspected that the bull market was nearing completion. I had written previously that the March 2005 high was the fifth wave in a fifth wave -- which means that the bull market is over. The minimum expectation is for the market to retest the bottom of Wave 4 (last summer's low), which is near 1050 in the S&P 500. That also happens to be a 38% retracement of the entire bull market (another minimum expectation). I don't know whether or not the summer low will hold. But I believe it will be tested. Charts 9 and 10 show that those numbers translate into 9700 for the Dow and 1750 for the Nasdaq.
Chart 8
Chart 9
Chart 10
HOW TO PLAY A BEAR MARKET ... This week's sector breakdowns show that there aren't many safe havens left in the market -- outside of healthcare and pharmaceuticals. Consumer staples and utilities held up better than most, but still lost ground. Former leaders like energy and basic materials were among the biggest losers. Outside of the medical area, I'd continue to recommend cash (via a money market fund) or a bear fund. Those comfortable doing so should be operating from the short side of the Dow Diamonds (DIA), the S&P 500 SPDR (SPY), or the Nasdaq 100 Shares (QQQQ).
