UTILITIES AND HEALTHCARE ARE MONTH'S TOP GROUPS -- WEEKLY HEALTHCARE LEADERS ARE AETNA, UNITEDHEALTH, AND WELLPOINT

DEFENSIVE ROTATION ... Although the stock market remains stuck in a short-term trading range, a more cautious tone has been revealed by sector rotations beneath the surface. Over the last month, for example, the two top market sectors have been utitilities and healthcare which are traditionally defensive groups. The two weakest sectors have been financials and energy. Chart 1 shows relative strength ratios of those four groups since the start of July plotted around the S&P 500 (flat black line). The chart shows financials and energy turning down during October just as healthcare started to turn up. Utilities turned up during November. Part of the rotation into those two latter groups has also represented a search for dividend-paying stocks. Telecom stocks (not shown here) are also part of that play. In fact, this week's two top groups have been utilities and telecom.

Chart 1

NEW DEFENSIVE BUYING ... Two of the things I always look for in sector work are absolute and relative strength. Absolute strength refers to a strong chart pattern. Relative strength refers to the group's performance versus the S&P 500. Charts 2 and 3 show strong absolute performance in the Utilities (XLU) and Health Care (XLV) SPDRS. Both charts show strong chart patterns. The XLV (Chart 3) has been hitting new-52-week highs. The XLU (Chart 2) has just broken out of a big basing pattern. What's especially noteworthy, however, is the recent upturn in their relative strength ratio (solid lines). Both ratios have recently broken down trendlines in place since March when the stock market bottomed. The last time the ratios turned up was the autumn of 2008 as the market was selling off. Investors usually turn to defensive stocks when they think the market is in danger of dropping or has rallied too far and is looking over-extended. The charts suggest that investors looking to place new money (or looking to protect existing profits without leaving the market) are rotating to these defensive (dividend-paying) stocks. According to Investor's Business Daily, utilities have the most stocks hitting new 52-week highs (28). Medicals came in third (20). [Telecom has 12 new 52-week highs].

Chart 2

Chart 3

HEALTHCARE BREAKOUTS... In recent messages, I've focused mainly on big pharmas that were leading the healthcare sector higher. This week's healthcare leaders are health insurers (which may be due to dropping of the "public option" in the Senate's healthcare plan). All three of the health insurers shown here achieved bullish breakouts. They include Aetna, UnitedHealth, andWellpoint. All of their relative strength ratios (solid line) turned up during October. UNH has just broken through major resistance near 30 (Chart 5), while Wellpoint appears to completed a big "head and shoulders" bottom (Chart 6).

Chart 4

Chart 5

Chart 6