DEMOCRATIC VICTORY WEAKENS HEALTHCARE SECTOR -- HOMEBUILDERS ARE FALLING AGAIN -- NASDAQ FINALLY CLOSES AT NEW 2006 HIGH
PHARM HOLDERS SELL OFF ON VOLUME ... The Democratic victory in yesterday's midterm election caused some selling in the healthcare sector today and drug stocks in particular. As a result, the day's weakest stock ETF was the Pharm Holders. The daily bars in Chart 1 show the PPH falling below its 50-day moving average for the first time in four months. More notable is the big pickup in trading volume that accompanied the selling. Not surprisingly, most of the big drug stocks ended the day in the red. In fact, the three weakest stocks in the Dow today (on an up day) were Merck (-4%), Pfizer (-2%) and Johnson & Johnson (-1%). The relative strength line below Chart 1 shows that drug stocks have been slipping since the start of October. Investors are concerned that Democrats may make changes to the medicare drug plan that will prove less profitable to the drug companies.
Chart 1
HOMEBUILDERS ARE STILL FALLING ... There's a lot of debate about whether or not the housing slowdown is over. Judging from the weak action in homebuilding stocks, the answer appears to be "no". Homebuilders were down again today. Chart 2 shows Pulte Homes falling to the lowest level in two months, and on rising volume. That's not encouraging sign for the stock and for the group. One possible beneficiary of the weak housing group is bonds. Chart 4 shows the 10-year Treasury Note yield dropping again today (as bond prices rose). Since weak housing hints at economic weakness, it's not surprising to see bond yields fall along with homebuilders. That wasn't enough, however, to stop the stock market from rallying even further. Most major stock averages hit new 52-week highs today. Including the Nasdaq.
Chart 2
Chart 3
NASDAQ FINALLY REACHES NEW 2006 HIGH... The Nasdaq market finally exceeded its spring high and it did so on respectable volume. The weekly bars in Chart 5 show the Nasdaq Composite Index closing over 2378 for the first time this year, and the first time in more than five years. Assuming the Nasdaq holds that bullish breakout through the balance of the week (Friday's close is the most important close on a weekly chart), that's good news for it and the rest of the market. Let's try to put the Nasdaq trend in better historical perspective.
Chart 4
NASDAQ HITS FIVE-YEAR HIGH... The monthly bars in Chart 5 show the Nasdaq Composite Index reaching the highest level in more than five years. The chart also shows that it's still 50% below its 2000 high. The solid line overlaid on the monthly bars is the Nasdaq/S&P 500 ratio. The chart shows that the overall market does better when the ratio is rising. That was the case from 1998 to 2000 and again starting in late 2002 (see arrows). The plunge in the ratio during 2000 signalled the start of a major bear market. The ratio has been flat to down over the last two years. But it's been rising since August. It still has a long ways to go to hit a multi-year high. But the fact that the Nasdaq is showing some new relative strength (and finally confirming upside breakouts in the blue chip averages) is a positive sign for both.
Chart 5
FIBONACCI RETRACEMENTS ... One way to arrive at potential upside targets is to use percentage retracements. Markets usually retrace previous trends (in the opposite direction) by certain predictable amounts. The horizontal bars in Chart 6 measure Fibonacci retracment levels of 38%, 50%, and 62% of the 2000-2002 bear market. The lower line (38%) is usually viewed as a minimum target. In other words, chances are high that a market will retrace at least that amount. The 38% retracemet line is at 2690. That's a little over 300 points (or 12%) from today's closing price. Given how much the Nasdaq has underperformed the rest of the market since the start of 2004, it may start playing catch-up.
Chart 6
