DRUG STOCKS ARE LEADING HEALTHCARE HIGHER -- ABBOTT LABS BREAKS OUT -- CHIPS PULL NASDAQ LOWER -- NASDAQ 100 BREAKS INITIAL SUPPORT ON HEAVY VOLUME

HEALTHCARE RS LINE MAY BE BOTTOMING ... On January 4, I wrote a message entitled: "Heathcare is Starting to Look Better". I showed the Healthcare SPDR (XLV) hitting a new record high. [It's doing so again today]. I pointed out, however, that its relative strength line was telling a more important story. That's because the healthcare group was shifting from one of the market's weakest sectors in 2006 to the strongest in 2007. I'm going to use Charts 1 and 2 to answer a couple of questions I've received. One is to recommend one of the market's weakest groups that's starting to move higher. Healthcare (and drugs in particular) certainly qualify. A second questions has to do with using point & figure charts on relative strength lines. The fact is that healthcare (which is defensive in nature) has been one of the market's weakest performers during the four-year bull market that starting in the spring of 2003. That may be changing. The XLV/SPX ratio in Chart 1 bottomed last May (when the market corrected downward). The ratio has fallen since the market rally started in August (as healthcare underperformed). The ratio has now climbed to the highest level in nearly three months and and is back over its 200-day moving average. It could be bottoming. Chart 2 is a point & figure chart of the XLV/SPX ratio. It's also on a buy signal. That suggests that healthcare is a good place to be. That's especially true in a bull market that's historically old.

Chart 1

Chart 2

HEALTHCARE RS LINE IN FOUR-YEAR DOWNTREND ... Chart 3 shows that the Healthcare/S&P 500 ratio peaked at the start of 2003 (when the market bottomed) and has been in a downtrend since then. That's in keeping with the defensive nature of the group. The red arrows are meant to show that the XLV/SPX ratio has followed a pattern of lower highs and lower lows from the spring of 2003 to May of last year (declining red arrows). The two green arrows to the bottom right are meant to show a pattern of higher lows in the ratio for the first time in four years. That's how bottoms start. To confirm a major bottom, however, the ratio still needs to clear the peak formed last September. But it's not too early to start moving money into the group.

Chart 3

PHARM HOLDERS ARE BREAKING OUT... Also at the start of January, I highlighted the upturn in pharmaceutical stocks which were the main drivers in the healthcare upturn. They still are. Chart 4 shows the Pharmaceutical Index (DRG) nearing a test of its late 2006 high. Notice the upturn in the DRG/SPX ratio, which had been dropping since August. That carries a double meaning. One is that big pharmas are back in favor. The other is that the market rally may need some correcting. I suspect that part of the money moving into pharmas is a defensive maneuver against an over-extended market. Chart 5 shows an even stronger chart pattern for the Pharm Holders (PPH) which are already at a new yearly high (with a rising RS line). On January 4 I wrote that "a close over 80 would constitute a major bullish breakout for the PPH". The next chart shows why.

Chart 4

Chart 5

PHARM HOLDERS TEST OF 2004 HIGH ... The monthly bars in Chart 6 show the Pharm Holders trading sideways from 2002 to 2007 in an apparent bottoming formation. That's not very impressive considering that the rest of the market has been rising. The weak relative performance of the drug group is demonstrated by the falling PPH/SPX ratio during those four years. But it's been rising since the end of 2005. That shows more interest in the group. What's more, the monthly bars show the PPH is challenging its 2004 high at 80 and not too far from its 2003 high at 81.72. A close through the latter number would be a very bullish sign for the drug group in particular and healthchare in general. That's because big pharmas carry a heavy weight in the XLV.

Chart 6

ABBOTT LABS HITS NEW RECORD ... The next two charts show why it's important to look at long-term charts along with short-term ones. Chart 7 shows Abbot Labs soaring to a new 52-week high today on very strong volume. It's clearly the day's leader in the rising drug group. The monthly bars in Chart 8, however, paint a much more bullish picture. It shows that ABT has broken through its 2002 highs to reach a new record high. I drew the two converging trendlines on January 4 to show a bullish "ascending triangle" in the stock. [A flat upper line and a rising lower line show that buyers are more aggressive than sellers]. That adds to the significance of today's bullish breakout.

Chart 7

Chart 8

THE CHIPS ARE FALLING ... Some of the money flowing into healthcare stocks today may have come out of semiconductors. That because the Semiconductor (SOX) Index tumbled 3.8% to undercut both its 200-day moving average and its recent low at 460 (Chart 9). Its relative strength line has fallen to the lowest level in five months. Chart 10 shows the Semiconductor Holders (SMH) gapping down on heavy volume to undercut its 200-day line as well. The SMH is now threatening its recent low near 33. Chart 11 shows the damage done to Applied Materials, which gappged down nearly 6% on heavy volume. That took a heavy toll on the Nasdaq market which was the day's biggest loser.

Chart 9

Chart 10

Chart 11

NASDAQ 100 FALLS ON HEAVY VOLUME... The technology-dominated Nasdaq 100 was the day's weakest index. Chart 12 shows the Nasdaq 100 Shares (QQQQ) falling 1.85% to close back below its recent breakout pont in the 44.76 to 44.86 region. The fact that it did so on heavy volume is doubly concerning. The QQQQ is now bearing down on its 50-day average (at 43.87). If that doesn't hold, a retest of its late December low could be in the offing. That carries some short-term negative connotations for the rest of the market. That's because the QQQQ has been leading the rest of the market higher since the August bottom. The QQQQ/SPX ratio at the top of Chart 12 shows a possible "double top" in the making. That probably explains today's profit-taking in the broader market. That may also explain why so much money flowed in the more defensive healthcare stocks.

Chart 12