HEALTHCARE ETF HITS 52-WEEK HIGH --- BIOTECH BREAKOUT -- ENERGY ETFS BREAKOUT -- HOW WILL THE MARKET ADJUST TO $70 OIL
HEALTHCARE ETF HITS 52-WEEK HIGH ... While a lot of attention has been paid to rising energy and basic material stocks this week, not much has been written about healthcare. It's time to correct that. Chart 1 shows the Health Care Sector SPDR (XLV) closing the week at a new 52-week high. [The only two other sector SPDRS to hit new highs were energy and utilities]. The relative strength ratio shows that healthcare started to do better than the S&P 500 near the end of last year. Although the relative strength line has been slipping of late, its trend is still higher. How much higher can be seen more plainly Chart 2 which shows that the healthcare relative strength ratio has broken a down trendline starting in the spring of 2003. That makes some sense. Healthcare is considered to be a defensive sector and would be expected to underperform during a cyclical bull market. Its stronger performance during 2005 is another sign that investors have been favoring more defensive stock sectors. Earlier in the year I listed healthcare as one of my favorite picks for the year. I haven't changed my mind. Chart 2 also shows that the XLV is challenging its 2004 peak. A lot of today's buying came from biotechs.
Chart 1
Chart 2
BIOTECH BREAKOUT ... Biotechs were one of Friday's strongest stock groups. The daily bars in Chart 3 show the Biotechnology Index (BTK) breaking through its 2005 highs to reach the highest level in a year. The weekly bars in Chart 4 also paint a bullish picture. It shows that the BTK has broken through the upper trendline in a bullish "symmetrical triangle" (see converging trendlines). That bullish pattern suggests that the early 2004 highs will probably be broken as well. The weekly relative strength line has also turned up. That's a bullish combination.
Chart 3
Chart 4
ENERGY INDEXES REACH NEW RECORDS... All of the energy stocks indexes that I track are now trading at record highs. [Crude also hit a new record high today]. The monthly bars in Chart 5 show the Energy Sector SPDR (XLE) closing over 45 for the first time in history. The same is true for the Oil Service Index (OSX) in Chart 6. But there's a difference between the two energy indexes. The XLE, which measures the entire energy sector, achieved its bullish breakout in mid-2004 when it broke through its 2001 highs. Its relative strength line has been soaring since then. The OSX, however, has just broken through its 2000 and 1997 highs to achieve its major bullish breakout. Its relative strength has risen a lot slower than that of the XLE. That suggests to me that the oil service group is a better value at this point than the energy sector in general. The easiest way to participate in the oil service rally is with the Oil Service Holders (OIH).
Chart 5
Chart 6
CRB INDEX TURNS UP -- OIL HITS NEW RECORD ... A big drop in May CPI and PPI numbers earlier in the week caused a lot of media talk about the end of commodity price inflation. It turns out that talk was premature. One of the biggest stories of the week was the upturn in commodity prices. It wasn't just energy. The CRB Index of seventeen commodity markets ended the week with a 2.37 point gain to close over 310 for the first time in two and half months. Most of the commodities closed higher. Copper hit a sixteen-year high while gold prices rallied to a three-month high. That drew money into basic materials stocks like aluminum, copper, gold, and steel. By week's end, the upside breakout in energy stocks was confirmed by a new high in crude oil. Crude rose $1.89 on Friday to close at $58.47 which exceeded its April high. That's a new record. Everyone will be talking about $60 next week. I think they'd better start talking about $70. And therein lies a caution for the stock market. I've heard a lot of analysts say that the stock market has adjusted to oil in the mid-50's. I doubt if it's ready for oil in the mid-60's or the mid-70's.
Chart 7
Chart 8
