BMY LEADS DRUG GROUP HIGHER -- HEALTHCARE ETFS CONTINUE TO GAIN -- WHY NEW DOW LEADERSHIP IS A CAUTION SIGN
BMY GAPS UP ON BIG VOLUME ... News that Bristol Myers Squibb reached a settlement calling for delayed production of the generic version of the world's second largest drug pushed the stock 11% higher today and made it the day's strongest stock. Chart 1 shows BMY gapping up to its spring 2005 high on massive volume. That helped make drug stocks the day's strongest group. Although one day's jump in one stock doesn't turn a lagging group into a winner, the fact is that drug stocks have been on a comeback of late. And some other drug stocks are showing stronger chart patterns. But first a chart look at the entire group which is enjoying a bullish breakout of its own.
Chart 1
PHARMACEUTICAL INDEX HITS 52-WEEK HIGH ... The daily bars in Chart 2 show the AMEX Pharmaceutical Index (DRG) breaking through its spring 2005 peak to reach a new 52-week high. The purple line shows its improving relative strength. The RS ratio line had been dropping from last spring to last December as drug stocks underperformed the S&P 500 badly. The rally since December has pushed the RS line over its yearlong down trendline (red line). That's a sign that new money is flowing into drug stocks for the first time in awhile.
Chart 2
DRUG STOCKS ARE GETTING STRONGER ... The weekly bars in Chart 3 show an improving chart picture for the entire drug group. It shows the DRG trading at the highest level in two years and headed for its early 2004 peak near 353. The purple line is the relative strength ratio of the DRG divided by the S&P 500. It shows underperformance throughout the entire bull market that started in the spring of 2003. That makes sense since drug stocks are defensive in nature. The red resistance line to the far right is the same one shown in the previous chart. The rise in the relative strength ratio isn't enough to reverse its three-year downtrend. But it could be a start in that direction. [The idea that investors are starting to favor large-cap defensive issues was addressed in a recent article on new signs of leadership in consumer staples (March 13, 2006)].
Chart 3
DRUG LEADERS ... The next three charts show some drug stocks that are emerging as leaders in the reviving group. All three use weekly bar charts. Chart 4 shows Eli Lilly challenging its spring 2005 high. A decisive close above that barrier near 59 would constitute a major bullish breakout. Chart 5 shows that Merck has already exceeded its 2005 high and is trading at the highest level since the fall of 2004. Chart 6 shows Wyeth trading at a two-year high. Its been a clear leader in the group. The monthly bars in Chart 7 show that WYE is also moving above its mid-2003 peak near 49. That's an impressive long-term breakout.
Chart 4
Chart 5
Chart 6
Chart 7
HEALTHCARE ETFS NEAR BULLISH BREAKOUTS ... The next chart shows the Pharm Holders (PPH) moving up to challenge its spring 2005 high at 74.68. This ETF provides a simple way to participate in any upturn without having to choose individual stocks. Another way to participate is with a more general healthcare fund which includes a lot of big pharmas. Chart 9 shows the Health Care Sector SPDR (XLV) forming an "ascending triangle" within a major uptrend. That's usually a bullish pattern.
Chart 8
Chart 9
DOW/NASDAQ RATIO EXCEEDS 200-DAY LINE ... I wrote recently that new upside leadership by the Dow Industrials was another early sign that investors were turning more cautious on the market. I'd like to elaborate on that point. Chart 12 is a ratio of the Dow Industrials divided by the Nasdaq Composite Index. The ratio bottomed in February and has now broken its 200-day moving average for the first time since last spring. That means that the Dow is now doing better than the Nasdaq. There are two messages here. One has to do with the lagging performance of the Nasdaq. My work shows that the Nasdaq is a leader when investors are more aggressive about the market. Dow leadership occurs when investors turn more cautious and start favoring the relative safety of large-cap blue chips. Chart 11 puts that in better perspective.
Chart 10
Chart 11
DOW LEADERSHIP IS A SIGN OF CAUTION... The green line in Chart 11 is the S&P 500 over the last two years. The reddish line is the ratio of theDow divided by the Nasdaq Composite. The two lines trend in opposite directions. You'll see that downturns in the ratio line (Dow underperformance) generally coincide with upturns in the S&P (like August 2004,May 2005, and October 2005). Upturns in the ratio (Dow outperformance) have coincided with downside corrections in the S&P (December 2004 and August 2005). The ratio has just broken a yearlong down trendline (with the Dow outperforming). That hasn't broken the major downtrend in the Dow/Nasdaq ratio, but it's a caution sign nonetheless. Chart 12 shows why. There have been two major turns in the Dow/Nasdaq ratio over the last six years. The ratio turned up in 2000 as the S&P fell (red circle). Investors favored blue chips during the bear market from 2000 to 2002. The ratio peaked at the end of 2002 as investors turned more bullish and switched over to the more offensive-minded Nasdaq stocks (green circle). That's why Dow leadership over the Nasdaq is a sign of market caution. At the very least, it suggests following the market's lead and starting to emphasize more blue chips in your portfolio.
Chart 12
