DRUGS AND TOBACCO ATTRACT NEW BUYING -- COCA COLA ENTERPRISES ACHIEVES BULLISH BREAKOUT -- RISING BOND YIELDS MAY BE HURTING PRECIOUS METALS -- MARKET RALLY FADES AS VIX JUMPS TO THREE-MONTH HIGH

OVERSOLD HEALTHCARE SECTOR BOUNCES ... It may be a sign that investors are turning a little more defensive, but some of this week's strongest groups have been in defensive areas like consumer staples and healthcare. Today's market reports show a housing sector that's continuing to weaken along with a drop in consumer confidence. Healthcare is the day's strongest sector. Part of the reason may be technical. Chart 1 shows two technical reasons why the Health Care SPDR (XLV) may be starting to bounce. One is the fact that the 14-day RSI line is bouncing off oversold territory at 30. Another is that the XLV has reached chart support along its January/February highs. The group's relative strength ratio (bottom of chart) is also starting to bounce for the first time in a month. Most of the buying is in pharmaceuticals.

Chart 1

PHARM HOLDERS ARE DAY'S TOP INDUSTRY ... The day's top industry ETF is Pharm Holders (PPH). Chart 2 shows that the short-term technical condition for the PPH is nearly identical to the Health Care SPDR shown in Chart 1. The RSI is in oversold territory at 30. And the PPH is stabilizing above its first quarter peak. The PPH relative strength ratio is also bouncing off chart support at its first quarter lows.

Chart 2

BRISTOL MYERS AND WYETH ARE DRUG LEADERS ... Two of the top performing drug stocks are Bristol Myers Squibb and Wyeth. Chart 3 shows BMY breaking out recently to a new five-year high. In today's trading, Wyeth is up more than 2% and is back over its 50-day moving average. Both of their relative strength ratios show superior performance. Other drug stocks bouncing today are Johnson & Johnson, Merck, and Pfizer. Merck was the Dow's top gainer. The Dow's second top performer is Altria which is part of a strong tobacco group. Tobacco stocks helped support the consumer staples sector.

Chart 3

Chart 4

REYNOLDS AMERICAN LEADS TOBACCO GROUP... Chart 5 shows Altria (MO) trading back over its 50-day moving average today. The stock has held up relatively well of late and is within a point of a new record high. The biggest tobacco gainer, however, is Reynolds American (RAI) which is gaining more than 3% today. Upside volume is also impressive. Chart 6 shows the stock jumping back above both moving average lines. The stock's relative strength ratio (top of Chart 5) shows the first real interest in this stock in nearly a year. UST, which has the weakest of the three tobacco stocks, is up nearly 2% today as well.

Chart 5

Chart 6

COCA COLA ENTERPRISES IS BREAKING OUT ... The day's top performer in the Consumer Staples SPDR is Coca Cola Enterprises (CCE). Three different bullish breakouts are shown in the next three charts. The daily bars in Chart 7 show the stock breaking out to a new 52-week high today. It's relative strength ratio (top of chart) turned up in April and is now trading at a nine-month high. There's more. The weekly bars in Chart 8 show the stock breaking through its mid-2005 peak at 23.41. That puts the stock at a new three-year high. Its relative strength ratio has broken a two-year down trendline. There's even more. The monthly bars in Chart 9 show CCE rising above a nine-year down trendline drawn over its 1998-2004 peaks.

Chart 7

Chart 8

Chart 9

RISING RATES MAY BE HURTING GOLD AND SILVER... Precious metals are very much on the defensive. Part of that may be due to weakness in energy prices. We can't blame precious metal selling on a rising dollar. The dollar is down today. I suspect part of gold and silver selloff has to to do with the recent jump in bond yields. Gold is a non interesting bearing asset. As a result, rising rates make it less attractive. Most of today's damage is being done in silver. Chart 11 shows Silver iShares (SLV) tumbling to a five-month low on very heavy volume. The green line on top of Chart 11 is the 10-Year T-Note Yield. I suspect the recent jump in bond yields to a nine-month high is part of the reason for the selling of those two commodities. The reasons for the selling aren't that important. The negative chart action is.

Chart 10

Chart 11

MARKET RALLY FADES AS VIX JUMPS... Once again, the market was unable to hold onto early gains. As a result, several stock indexes are drawing dangerously close to their June lows. Meanwhile, a cautionary signal was given by the CBOE Volatility (VIX) Index which jumped 9% today and closed over 18 for the first time in three months. Although most market sectors closed lower today, investors are showing a slight preference for defensive stock groups. The day's top sector was healthcare with most of that buying coming in big pharmas. Some consumer staples (like tobacco stocks and Coca Cola Enterprises) also had strong chart days. That may be a sign that continuing weakness in housing, subprime mortage problems, and rising bond yields are beginning to erode consumer and investor confidence.