PHARMACEUTICAL STOCKS LEAD HEALTHCARE HIGHER -- DRUG LEADERS ARE BMY, PFIZER, AND LLY -- ABBOTT LABS MAY BE ON VERGE OF BULLISH BREAKOUT -- EVEN MERCK IS RISING -- DRUG LEADERSHIP SHOWS INVESTORS ARE STILL IN DEFENSIVE MOOD
PHARMACEUTICAL HOLDERS OUTPERFORM HEALTHCARE SPDR... Arthur Hill yesterday showed market leadership by defensive stocks that include staples, healthcare, and utilities. That defensive leadership started with the market peak last spring, and has re-asserted itself again recently. I've been focusing mainly on pharmaceutical stocks in recent messages. That's because pharmaceutical stocks are the leading group within the healthcare sector. Figure 1 compares Pharm Holders (red line) and the Healthcare SPDR (blue line) to the S&P 500 (flat back line). The two upper lines are in effect relative strength lines. They show two things. One is that healthcare is a market leader. The second is that pharmaceutical stocks are even stronger. Notice, for example, that the relative strength line for Pharm Holders has recently broken out to a new high, while the blue line has yet to do so. In addition to that, a number of big pharm stocks are hitting new highs.
Chart 1
DRUG BREAKOUTS... Chart 2 shows the three strongest drug stocks in the PPH this year. All three have recently achieved upside breakouts. They include Bristol Myers (blue line), Pfizer (red line), and Eli Lilly (green line). The black line is the PPH. As you can see, the three drug leaders have outperformed the group as a whole. That makes them the strongest stocks in the strongest industry in one of the market's strongest sectors. BMY is the strongest of the three (+34% for the year) and is trading at the highest level in ten years. Pfizer (+28% for the year) is breaking out to the highest level in four years. Lilly (+22% for the year) is trading at the highest level in three years. By comparison, the PPH is up 12% for the year (versus 8% for the XLV and -3% for the S&P 500).
Chart 2
ABBOTT LABS MAY BE NEXT... Another big drug stock that may be on the verge of a huge bullish breakout is Abbott Labs. The weekly bars in Chart 3 show that the stock has been essentially in a sideways holding pattern since 2008. That may be about to change. ABT appears poised to exceed its 2008 high around 54 which would put the stock at a new record high. The stock's relative strength (solid) line turned up during the spring and is still rising. The odds for an upside breakout are greatly increased by the fact that other drug stocks are doing the same.
(click to view a live version of this chart)
Chart 3
EVEN MERCK IS RISING ... It's really a good sign for any group when even its weakest stock is breaking out. Merck has gained 4% this year to make it the weakest of the big pharma stocks. Even so, it's in the process of breaking out. The daily bars in Chart 4 show the stock rising over 1% today and exceeding its November high. That puts Merck in position to challenge its May peak just above 36. The weekly bars in Chart 5 put that test in better perspective by showing the sideways trading range in Merck since 2010. A decisive close above 36 would put Merck at the highest level in nearly two years. Notice that its relative strength (solid) line has been rising as well. I take two messages from these upside breakouts in drug stocks and drug leadership. The most important is that it looks like a good place to be at this point in time. The second message is that investors continue to favor defensive stocks which shows lack of confidence in the stock market as a whole.
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
EURO IN IMPORTANT TEST OF SUPPORT... Weakness in the Euro (combined with dollar strength) has kept downside pressure on global stocks and commodities. Chart 6, however, shows that the Euro has fallen to a level of potential support near 130 which was the low formed last January (blue circles). In addition, the 14-day RSI (red line) has reached oversold territory near 30 (red circle). Those two factors may take some pressure off the Euro, at least over the short-term. Unfortunately, the major trend of the Euro is still down which argues against expecting too much on the upside. Needless to say, a decisive drop below January's low in the Euro would be a bad sign for all. I suspect that fear is one of that things pushing investors into drug stocks.
