HEALTHCARE LEADERS INCLUDE SOME DRUGS -- PHARM HOLDERS TURN UP -- PFE AND JNJ ARE BOUNCING -- BUT SGP AND WYE ARE LEADING
NEW HEALTHCARE LEADERSHIP ... Yesterday I showed the Health Care Select SPDR (XLV) hitting a new high for the year and referred to the group as defensive in nature. I'd like to build on both themes today since healthcare is one of today's sector leaders and is extending yesterday's bullish breakout. The weekly bars in Chart 1 show the XLV having broken through its early 2004 peak. That also happens to be an all-time high for the Exchange Traded Fund. The relative strength ratio (solid line) bottomed near the end of last year and has been rising throughout 2005. It's also broken a down trendline extending back to the spring of 2003. Which brings us to the defensive nature of the healthcare group. The spring of 2003 marked the beginning of the cyclical bull market that's still in effect. It also marked the end of healthcare outperformance that lasted during the bear market years from 2000 to 2002. That's what defensive stocks do. Their relative strength ratio rises when the market is weak, and falls when the market is strong. The fact that it's been rising for most of 2005 is a sign that money is moving into more defensive sectors in an aging bull market. That's another reason why healthcare is an attractive choice right now.
Chart 1
HEALTHCARE VERSUS THE S&P 500... Chart 2 puts the relative performance of the healthcare sector into better perspective over the last seven years. The purple line is the S&P 500. The green line is a ratio of the Health Care SPDR (XLV) divided by the S&P 500. Notice that the two lines have an inverse correlation (they trend in the opposite directions). The green ratio line bottomed at the end of 2000 as the S&P 500 was peaking. That means that healthcare acted as a safe haven during the two year bear market. The XLV/S&P ratio peaked in the fourth quarter of 2002 as the S&P 500 was bottoming. That means that money moved out of defensive healthcare stocks as investors turned more optimistic. Which brings us to 2005. The ratio bottomed late last year and has risen throughout 2005. That makes healthcare one of this year's top performers. That sends me two messages. One that healthcare is a good place to be. The other is that the cyclical bull market may be in its final phase. Many longer-term indicators seem to confirm the latter view.
Chart 2
DRUGS MAY BE BOTTOMING ... Most of this year's healthcare leadership has come from biotechs and HMOs. Drug stocks have been healthcare laggards. That may be finally changing. Yesterday I showed the Pharmaceutical (DRG) Index starting to rally. Today the Pharm Holders (PPH) are one of the leading ETFs. The daily bars shows the PPH knifing through its (blue) 50-day average for the first time since June. The PPH/S&P 500 ratio line tells a similar story. It peaked in April and has been falling since then as drug stocks fell out of favor. The ratio line appears to be bottoming. That's the first sign of interest in the pharmaceutical group in six months. Where the ratio line is rallying from also carries some bullish significance. Chart 4 shows the ratio line bouncing off the previous lows hit near the end of last year and the start of this year. That adds credibility to the view that the PPH/SPX ratio is in a support area and is bottoming. The new-found interest in big pharmas may have been enough push the Health Care SPDR (XLV) to a new high. That's because the biggest stocks in the XLV are pharmaceuticals.
Chart 3
Chart 4
PFIZER AND JNJ ARE BOUNCING ... The two biggest stock holdings in the Healthcare SPDR (XLV) and the Pharm Holders (PPH) are Pfizer and Johnson & Johnson. Both have bounced strongly over the last two days. JNJ is the stronger of the two and most closely matches the PPH penetration of its 50-day average. Lilly and Bristol Myers Squibb have already cleared both moving average lines. Some drug stocks are actually hitting new yearly highs.
Chart 5
Chart 6
SGP AND WYETH HIT 52-WEEK HIGHS ... The two pharma leaders in the PPH are shown below. Schering Plough (SGP) is trading at a new three-year high, while Wyeth (WYE) has reached the highest level in two years. They represent two of the strongest stocks in the drug group. If you're looking for leadership in a pharmaceutical group that's just starting to rally, there it is.
Chart 7
Chart 8
