CONSUMER STAPLES AND HEALTHCARE ARE DEFENSIVE MARKET LEADERS -- BIG PHARMA LEADERS ARE BMY, SGP, AND PFE -- RETAIL STOCKS ARE DOING OKAY IN SPITE OF BAD NEWS -- CONSUMER DISCRETIONARY SECTOR IS HELPING LEAD MARKET HIGHER

HEALTHCARE AND STAPLES ARE DEFENSIVE LEADERS ... Arthur Hill and myself have noted several times this past year that defensive sectors like consumer staples and healthcare have been market leaders. That's normal during a bear market and recession. This time last year (December 28, 2007), I wrote a message entitled "2007 Performance Rankings Reflect Economic Weakness for 2008 and Problems for the Stock Market: 2007 Sector Leaders are Mostly Defensive". Those leaders included energy, materials, utilities, consumer staples and healthcare. As the economy started to weaken, energy and materials started to drop in mid-2008. That left the last three as market leaders. Chart 1 shows relative strength lines for the Consumer Staples SPDR (XLP) and Healthcare SPDR (XLV) since the start of 2007. Staples started outperforming during the second half of 2007. The healthcare sector, however, didn't start outperforming the S&P 500 until May when the second downleg in the bear market started. [Healthcare has been the market's strongest sector during the fourth quarter of 2008]. Chart 2 compares the relative strength lines for the XLV and Pharm Holders (PPH) to show that the latter accounts for much of the healthcare strength since May. That being the case, I thought it a good time to look at some leaders in that group for those investors who are looking for a relatively safe place to commit some money.

Chart 1

Chart 2

FOURTH QUARTER PHARMA LEADERS ... The three fourth quarter leaders in big pharma are shown below. Their relative strength lines have been rising (versus the S&P 500) since June and all three are trading above their 50-day averages. Bristol Myers Squibb (Chart 3) is the only one that has already cleared its 200-day average. Schering Plough (Chart 5) and Pfizer (Chart 6) are nearing a test of their 200-day lines.

Chart 3

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Chart 5

RETAIL STRENGTH ... Despite all the reports about how bad the holiday season has been for retailers, the group as a whole is holding up pretty well. Three examples of that retail resiliency are seen in the charts below in order of relative strength. First of all, all three are trading over their 50-day averages. Macy's (Chart 6) rose above that resistance line more than a week ago and is now finding support there. Its relative strength ratio (bottom of chart) has been rising all month. Chart 7 shows Best Buy trading well above its 50-day line and testing resistance near its early November peak. Its RS line has reached a three-month high. Mattel is doing even better. Chart 8 shows that stock trading at the highest level since October. Its RS line has reached a six-month high. All three stocks are still below their 200-day averages. The ability of retailers to rally in the face of bad news, however, is an encouraging sign. That's helping make the consumer discretionary sector the day's strongest group which is helping pull the rest of the market higher.

Chart 6

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CONSUMER DISRETIONARY SPDR TRADES OVER 50-DAY LINE... Chart 9 shows that the Consumer Discretionary SPDR (XLY) has spent most of the last three weeks trading over its 50-day average. That's one sign of relative strength. Another is the jump in its RS line (bottom of Chart 9). Arthur Hill noted last week that relative strength in this economically-sensitive group is a positive sign for the market. Chart 10 shows the S&P 500 trying to climb back over its 50-day line. The S&P 500 is bouncing from the lower end of a three-week trading range between 850 and 920.

Chart 9

Chart 10