HEALTHCARE IS STARTING TO LOOK BETTER -- BIOTECHS AND DRUGS RALLY -- LEADERS ARE ABBOTT LABS, AMGEN, GENZYME, AND JNJ
HEALTHCARE WAS WEAKEST SECTOR IN 2006 ... Healthcare was the stock market's weakest sector during 2006. The Healthcare Sector SPDR (XLV) gained 5.4% for the entire year which put it -6.2% behind the S&P 500 which rose 11.6%. Possibly for that reason, a number of market strategists have made healthcare one of their top picks for 2007. The group is certainly off to a good start. The daily bars in Chart 1 show the XLV climbing 1% today and nearing a record high. The more important line is the relative strength ratio (blue line) which is just starting to bounce after falling throughout the fourth quarter of last year. An analysis of the blue line shows something else. The healthcare RS line started to rise during May when the rest of the market corrected. It then peaked in September shortly after the market bottomed. The fact that it's bouncing now may suggest that the market is ripe for a pullback or consolidation. It further suggests that this may be a good time to revisit healthcare. The easiest way to participate in any healthcare rebound is to buy the XLV. Another is to buy pharmaceticals which are the largest part of the XLV.
Chart 1
PHARMACEUTIAL INDEX TURNS UP ... Pharmaceutical stocks also had a rough 2006 and were one of the market's weakest groups. But they're off to a good start in 2007. The daily bars in Chart 2 show the Pharmaceutical Index (DRG) breaking through its 50-day moving average to reach a new two-month high after bouncing off its 200-day average in November. The relative strength ratio below the chart also shows new leadership coming from the drug group. Naturally, that's helping make Pharm Holders (PPH) one of the day's strongest groups. Chart 3 shows the PPH trading back over its 50-day line and nearing a test of its October high. Its relative strength ratio is also turning up. A longer-range look at the drug group also shows a promising chart picture.
Chart 2
Chart 3
PPH NEARS POSSIBLE BULLISH BREAKOUT ... Chart 4 shows that the Pharm Holders are moving up toward the highs formed in 2003 and early 2004. Needless to say, a close above 80 would constitute a major bullish breakout for the PPH, and would put it at the highest level since before the latest bull market in stocks began in the spring of 2003. The relative improvement in the drug group is also refected in its relative strength ratio (blue line). After declining from the spring of 2003 (when the bull market began), the drug RS line has started to rise. A number of individual drug stocks show promising chart patterns.
Chart 4
ABBOTT LABS NEARS RECORD HIGH ... Abbott Labs is one of the clearcut leaders in the drug group. The monthly bars in Chart 5 show the stock hitting a new five-year high today and nearing a challenge of the previous record reached at the start of 2002 at 50.41. The two converging trendlines on Chart 5 look like a bullish "ascending triangle". [An ascending triangle has a rising lower line and a flat upper line. It usually results in an upside breakout]. The rising relative strength ratio (ABT:DRG) shows that ABT has been a leader in the drug group for several years.
Chart 5
J&J NEARS RECORD -- BMY HITS 3-YEAR HIGH ... The weekly bars in Chart 6 show Johnson & Johnson getting ready to re-challenge its spring 2005 high at 67.35. A close over 69.02 would put the big pharma at a new record. Its rising relative strength ratio shows that JNJ has been one of the stronger drug stocks. It's also a very influential stock. It's the most heavily weighted stock in the Healthcare SPDR (XLV) and the second biggest holding in the Pharm Holders (PPH). Bristol Myers Squibb is also worth a look. The weekly bars in Chart 7 show BMY hitting a new three-year high and close to challenging its early 2004 peak. Biotechs are also boosting the healthcare group.
Chart 6
Chart 7
BIOTECH S ARE ALSO BOUNCING ... Biotech stocks are also contributing to today's healtcare rally. The daily bars in Chart 8 show the Biotech Holders (BBH) climbing over 2% and testing their 50-day line -- after holding above their 200-day average. Upside volume is good. The BBH/SPX ratio is starting to bounce for the first time in two months. A lot of today's bounce is coming from Amgen and Genzyme. Charts 9 and 10 show both stocks climbing back over their 200-day lines on rising volume. Genzyme's 4.8% gain makes it the day's strongest percentage gainer in the S&P 500. Amgen is the second biggest holding in the BBH and the third biggest in the Healtchare SPDR (XLV). The biggest holding in BBH (Genentech) is back over its moving average lines as well. Of the two healthcare categories shown herein, pharmaceuticals look like the safer bet. An even safer bet is the Healthcare SPDR (XLV) which contains the largest stocks in both categories (but is more heavily weighted toward drugs). If you're looking for a place to put some new funds in an over-extended stock market, healthcare looks like a top candidate.
Chart 8
Chart 9
Chart 10
