ABSENCE OF VOLUME DETRACTS FROM MARKET GAINS -- THE RALLY IN BIG PHARMAS, HOWEVER, LOOKS LIKE THE REAL THING
HEALTHCARE IS GETTING BETTER... On Friday I wrote about how the big pharmas were attracting some serious money and were starting to pull the entire healthcare sector higher. I showed the daily chart of the Health Care Sector SPDR (XLV) and suggested that it needed a close over its 200-day average to confirm that it's upturn has some staying power. It did so in pretty convincing fashion today as Chart 1 shows. Once again, most of the big buying came from the big pharmas. I also showed the Pharm Holders (PPH) nearing a test of their spring highs. They not only reached that high, but exceeded it (Chart 2). And they did so on explosive volume. That's a pretty bullish combination. Notice that both of their relative strength ratios turned in May as the rest of the market weakened. That's what a defensive group is supposed to do. The weekly charts make today's breakout even more impressive.
Chart 1
Chart 2
DRUGS MAY BE COMPLETING MAJOR BOTTOM ... The weekly bars in Chart 3 show the Pharm Holders on the verge of an even more impressive breakout. A decisive close over 74 would achieve a new two-year high and complete a bottoming pattern that's been in effect since October 2004. The AMEX Pharmaceutical Index (Chart 4) has already done that. Chart 5 puts the DRG breakout in better perspective. It shows that the DRG has been trading sideways for the last three years, which covers the entire bull market that started in the spring of 2003. It now appears headed for a test of its early 2004 peak. Chart 5 shows its relative strength line breaking a down trendline that started in the spring of 2003. That tells us that that big pharmas are starting to outperform the S&P for the first time in three years. While that's good for the drug sector (and healthcare), it might not be good for the S&P 500. It's no accident that drugs started to underperform the S&P 500 just as the bull market was starting in the spring of 2003. Defensive stocks usually fall out of favor in a bull market. The fact that they're just now starting to come back into favor may be another sign that the three-year bull market in stocks is in danger.
Chart 3
Chart 4
Chart 5
DRUG LEADERS ... Virtually all of the drug stocks had strong days. Three of the day's standouts are shown below. Pfizer knifed through its 200-day average on rising volume. Schering Plough broke out to a new seven-month on monster volume. Merck hit a new 52-week high on rising volume as well. I happen to believe that the new urgency to buy into the healthcare sector (and big pharmas in particular) is part of a search for defensive stocks that have been out of favor. One of the reasons given for today's market rise was the buying of drug stocks. While they no doubt contributed to the bullish mood, renewed confidence in drug stocks isn't necessarily a vote of confidence in the rest of the market. It's often the just opposite. While the market saw impressive price gains today, declining trading volume made the day a lot less impressive than it looked on the surface. We'll be watching to see if there's any follow-through tomorrow. Whether or not you agree with my view that recent drug buying is a defensive move, big pharma looks like a group whose time has come.
Chart 6
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Chart 8
