BIOTECHS AND DRUGS PUSH HEALTHCARE SPDR TO RECORD HIGH -- MERCK LEADS BIG PHARMA IN UPSIDE BREAKOUT -- GENENTECH WEIGHS ON BIOTECH HOLDERS -- PRECIOUS METAL LEADERS

HEALTHCARE SPDR BREAKS OUT ... Last Friday I wrote about new signs of life in the traditionally defensive healthcare sector. I also wrote that most of that new leadership was coming from biotechs and pharmaceuticals. Since then, healthcare has taken off. Chart 1 shows the Health Care SPDR (XLV) gapping up to new record high today. Also impressive is the upside breakout in the XLV/SPX relative strength ratio. Last week I wrote that the ratio was showing signs of bottoming for the first time in four years. This week's jump has put the ratio at the highest level in five months. That puts healthchare in a new leadership role. On Tuesday, I showed the Pharm Holders (PPH) on the verge of breaking through its mid-2003 peak just above 80. The monthly bars in Chart 2 show the PPH achieving that major bullish breakout by week's end. Most of the stocks that led the healthcare surge are in the biotech and pharma groups and have been shown here before. They include Medimmune (+20%), Merck (+9%), Schering Plough (+7%), and Wyeth (+5%). [Manor Care gained 12%]. The biggest heathcare gainer on Friday was Merck.

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MERCK HITS THREE-YEAR HIGH ... The daily bars in Chart 3 show Merck gapping up 8% today on extremely heavy volume. Its relative strength ratio (bottom of chart) hit a new two-year high. On Monday April 2, I showed Merck breaking through the 45 level (green circle), and suggested that a close over 46 would be a very bullish development. [Arthur Hill expressed the same view this past Wednesday]. I showed an earlier version of the monthly bars in Chart 4 a couple of weeks back to make the point that the next upside Merck target would be a test of its mid-2003 high near 54. That target looks even more likely now.

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WHICH BIOTECH ETF MATTERS ... Last Friday I also showed the Biotech iShares (IBB) rising above its 50-day moving average which was reflective of new buying in the biotech group. Its relative strength ratio continues to rise as well. A large part of the credit for that rise goes to stocks like Medimmune which are heavily weighted in the IBB. By contrast, Chart 6 shows relatively weaker action by the Biotech Holders (BBH). The reason for that poor performance can be blamed on Genentech (DNA). Chart 7 shows that big biotech stock having a down week and still trading below its 200-day moving average. It just so happens that DNA is the biggest holding in the BBH (and doesn't even appear in the top ten holdings for the IBB). There are a couple of lessons there. One is that it's a good idea to see what stocks are included in the various ETFs (and Holders) and their relative weighting. [You can find that information on AMEX.com]. A second lesson has to do with liquidity. Biotech iShares show much more daily volume that Biotech Holders. I generally prefer the ETF with the most liquidity which, in this case, is IBB.

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PRECIOUS METAL LEADERS... On Tuesday, I showed the AMEX Gold Bugs Index (HUI) on the verge of a bullish breakout near 360. The two converging trendlines drawn on Chart 8 since last October have the look of an "ascending triangle" which is a bullish pattern. [An ascending triangle has a flat upper line and a rising lower line which means that buyers are more aggressive than sellers]. One of our readers asked which of the stocks in that index had the strongest chart patterns. One of them is Randgold Resources (Chart 9) which is nearing a test of its spring 2006 high (Chart 9). Another is Kinross Gold (Chart 10) which is on the verge of an eight-month high. The third is more of a silver stock. Chart 11 shows Hecla Mining already trading at a new recovery high. [All three rising relative strength ratios are plotted against the Gold Bugs Index]. Although HL appears to be the strongest of the three over the last eighteen months, it's actually playing catch up. Chart 12 shows Hecla challenging its early 2003 peak at 9.31. Most gold stocks have already surpassed that barrier. That's because silver started rising a lot later than gold and, more recently, has been acting stronger.

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