PHARM HOLDERS REACH 52-WEEK HIGH -- ABBOTT LABS GAPS HIGHER ON ACQUISITION NEWS -- WYETH HITS THREE-YEAR HIGH -- BRISTOL MYERS SQUIBB NEARS BULLISH BREAKOUT -- WATSON PHARMACEUTICALS HITS FIVE-YEAR HIGH

DRUG STOCKS SHOWING SOME LEADERSHIP... At the start of last week, I wrote an article about some money starting to flow into the healthcare sector. My main focus in that earlier article was on biotech stocks that were starting to attract some money. Today's healthcare focus is on drug stocks. But first a look at healthcare itself. Chart 1 shows the Healthcare Select SPDR (XLV) nearing the highest level in eleven months. Of more importance, is the XLV/SPX relative strength ratio which is the solid line overlaid on the price bars. The ratio shows that the defensive healthcare group has been an underperformer since the market bottomed in March (after outperforming for most of the previous year). What has attracted my notice is that THE ratio is starting to find some support along its spring/summer low. That could be happening for two reasons. One is that investors are turning to the more defensive healthcare group as insurance against a market correction. A second reasons could be simply the search for undervalued stocks that haven't participated in the market rally. Either way, some money is starting to flow into healthcare. To be more specific, into pharmaceutical stocks.

Chart 1

PHARM HOLDERS HIT 52-WEEK HIGH ... Chart 2 shows Pharm Holders (PPH) hitting a new 52-week high today. The solid line is the PPH:XLV ratio over the last year. This week's upside breakout in the ratio line means that big pharma is finally starting to exert some upside leadership in the healthcare group. One way to play that is to buy Pharm Holders. Another is to look for some individual pharma stocks that show upside potential.

Chart 2

ABBOTT LABS... A lot of this week's buying is coming from Abbott Labs. Last Friday I showed the stock ending the week above its 200-day average for the first time since February. The stock surged to a seven-month high on Monday in heavy trading on acquisition news (Chart 3). So far, it is holding above its breakaway gap. Its relative strength ratio (solid line) is also showing some bounce for the first time in several months. Several other stocks in the group are attracting some buying as well.

Chart 3

WYETH REACHES TWO-YEAR HIGH... Not surprisingly, seven of the top ten holdings in the PPH are big pharma stocks. I've chosen two of them because of their superior relative strength and/or promising chart pattern. Wyeth is the strongest of the big pharma stocks. The weekly bars in Chart 4 show the drug leader hitting a new 52-week high today and, more importantly, clearing previous resistance at its mid-2008 peak near 48. That puts Wyeth at the highest level in more than two years. The WYE:PPH ratio (below chart) shows the stock to be a prominent leader in the group.

Chart 4

BMY NEARS BULLISH BREAKOUT ... Bristol Myers Squibb appears to be on the verge of a bullish breakout. The weekly bars in Chart 5 show BMY to be challenging its late 2008 high at 23.28. A decisive close above that prominent chart barrier would push the stock to the highest level since the start of 2008. Needless to say, that would be a very bullish development. The BMY/PPH ratio (below chart) also shows the stock to be potential leader in the pharmaceutical group.

Chart 5

WATSON PHARMACEUTICALS HITS THREE-YEAR HIGH... Watson Pharmaceuticals isn't one of the bigger holdings in the Phamaceutical Holders, but it deserves mention. The weekly bars in Chart 6 show the stock having broken through its mid-2007 peak just below 34. That puts the stock at the highest level in five years. Its relative strength ratio (below chart) also shows WPI to be a PPH leader. There's another chart lesson I'd like to make with Chart 6 having to do with perspective. An investor might conclude after looking at the chart that WPI is too expensive to buy after nearly doubling in price in a year. The monthly bars in Chart 7 should dispel that view. They show WPI trading over 37 today for the first time since 2004 after having recently broken a ten-year down trendline. The next potential upside target is its late 2003 peak near 50. WPI is still trading at only half of its 2000 value. That longer term perspective makes the stock look like a relative bargain.

Chart 6

Chart 7

INITIAL S&P 500 SUPPORT IS AT 1040... The market gave back some of yesterday's gain and it did so on slightly higher volume. The hourly bars in Chart 8, however, show that the S&P 500 uptrend from its September low is still intact. Last Friday, I showed initial chart support for the S&P 500 to be along its late August peak near 1040 (horizontal line). A previous peak is always the first line of defense in any market pullback. The S&P 500 bounced off that level yesterday. Keep an eye on the 1040 level. The uptrend will remain intact as long as prices remain above that support level. Any close below that level would signal a deeper pullback to the September low. If you're looking for someplace to put some money, and are nervous about the possibility for an autumn correction, the healthcare sector may be worth a look. I suspect some investors are starting to do just that.

Chart 8