STOCKS START SECOND HALF ON AN UP NOTE -- HEALTHCARE SPDR ACHIEVES BULLISH BREAKOUT -- BIOGEN LEADS BIOTECH RALLY -- BUT A LOT OF OTHER BIOTECHS ARE RISING AS WELL -- PHARMACEUTICAL ISHARES ALSO BREAK OUT -- MERCK, ELI LILLY, AND PFIZER LEAD DRUG RALLY
STOCKS START SECOND HALF ON A STRONG NOTE ... After a shaky month of June, stocks started the second half of the year on a positive note. And moving average lines continue to play an important role in that stronger start. Chart 1 shows the Dow Industrials ending the week on top of their 200-day moving average. The Dow gained +0.7% during the week and continues to lag behind the rest of the market. That's mainly because several of its stock components are more vulnerable to trade problems. The S&P 500 gained a stronger +1.5% on the week. Chart 2 shows the SPX ending the week well above its 50-day average. It may be headed for a test of its June high. Its 9-day RSI line (top box) crossed back over 50. And its daily MACD lines (lower box) are getting close to turning positive (black circle). The Nasdaq market gained an even stronger +2.3%. Chart 3 shows the Nasdaq Composite Index moving further above its 50-day average. The only negative in Friday's price gains was the fact that they occurred on the lowest trading volume of the year. Normally the Nasdaq market is driven higher by technology stocks. They did have a strong week. But the five biggest percentage gainers in the Nasdaq 100 this week were biotech stocks. That's not too surprising considering that biotechs gained more than 5% on the week to lead the rest of the market higher. And especially the healthcare sector.
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Chart 1
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Chart 2
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Chart 3
HEALTHCARE SPDR REACHES FOUR-MONTH HIGH ... Healthcare stocks gained +3% during the week and were the market's strongest sector. Chart 4 shows the Health Care SPDR (XLV) breaking through a "neckline" drawn over its March/June highs to reach the highest level in four months. And it closed just shy of its March intra-day high at 86.23. A close above that barrier would put the XLV at the highest level since February. It's also doing better on a relative strength basis. The XLV/SPX ratio (top box) has been rising since the beginning of May and has reached the highest level since late April. The upper box also shows the relative strength ratio having risen above a falling trendline extending back to the January high. That suggests further gains ahead. Biotechs were the biggest healthcare gainers this week (5.5%). It's important to note, however, that each part of the healthcare sector saw decent gains this week including pharmaceuticals (+2.9%), medical supplies (+2.8%), healthcare providers (+2.3%), and medical equipment (+1.6%). That suggests that the healthcare rally is pretty broad-based, which increases the odds of it continuing. We'll take a closer look at this week's two strongest healthcare groups -- biotechs and pharmaceuticals.
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Chart 4
BIOGEN LEADS BIOTECHS HIGHER ON FRIDAY ... Biotechs were the week's star performers. Chart 5 shows the Nasdaq Biotechnology iShares (IBB) leaping +3.7% to reach the highest level since January. And they did so on rising volume. Their relative strength ratio (top box) rose to the highest level in nine months. A 19% jump in the price of Biogen (BIIB) on Friday was the biggest reason for that big gain (see Chart 6). It should be noted, however, that a lot of other biotech stocks also had a good day and a good week. That's important because it shows that a number of other large biotech stocks are also supporting the biotech rally. While Biogen was this week's big biotech story, there are other stocks in that group that are doing as well or better this year.
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Chart 5
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Chart 6
BIOTECH LEADERS ... The Biotech iShares (IBB) in Chart 5 are the biggest and most liquid ETF in that group. Chart 7 shows a number of its biggest stock components doing better than the ETF since the start of the year. They include Illumina (+30%), Vertex (+15%), Biogen (+12%), Amgen (+11%), and Alexion (10%). All five stocks did better than the +9% gain in the ETF. A couple of biotechs that didn't make the list also saw big gains this week including Regeneron (+7%) and Gilead (+6%). Pharmaceutical stocks also achieved some upside breakouts of their own.
Chart 7
PHARMACEUTICAL ISHARES ALSO ACHIEVE BULLISH BREAKOUT ... Pharmaceutical stocks achieved a bullish breakout of their own this week, and also contributed to this week's healthcare rally. Chart 8 shows the U.S. Pharmaceuticals iShares (IHE) rising to the highest level since in nearly six months. Its relative strength ratio (which has been rising since early May) reached the highest level since January. That's not too surprising considering that a number of the largest stocks in the IHE have been rising as well, and achieving their own upside breakouts. Let's take a look at three of those big pharma leaders.
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Chart 8
MERCK, LILLY, AND PFIZER ARE DRUG LEADERS... The three drug stocks shown below are among the five biggest stocks in the pharma ETF shown in Chart 8. Together they account for nearly a quarter (22.5%) of that ETF. Their strong chart patterns help explain why the group is doing so well. They're shown in order of this year's biggest percentage gains, starting with Merck (MRK). Chart 9 shows that drug leader challenging its June peak (and a trendline drawn over its January/June peaks). An upside breakout appears likely. Its relative strength line (top box) is nearlng an upside breakout as well. Chart 10 shows Eli Lilly (LLY) hitting a new high for the year this past week and nearing a challenge of its all-time "intra-day" high formed last December. On a closing basis, the drug leader ended the week at a record high. Here's another drug breakout. Chart 11 shows Pfizer (PFE) rising above its March/April highs to reach the highest level since late January. That's a classic bullish breakout. Its relative strength ratio has been rising as well. The strong chart action in those three big pharma stocks certainly contributed to this week's upside breakout in that group, and also contributed to the upturn in the healthcare sector. And it supports the idea that the healthcare rally has a lot going for it.
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Chart 9
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Chart 10
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Chart 11
DOW TRANSPORTS REGAIN 200-DAY LINE... My Thursday message showed a number of U.S. stock indexes rising back above important moving average lines, or bouncing off them. Here's one more. Chart 12 shows the Dow Jones Transportation Average ending the week on top of its 200-day moving average (red circle), and a rising support line drawn under its February/May lows. That's a very important test for it and the market. Transportation stocks are usually tied to the ups and downs of the U.S. economy. So their performance matters. It's also a good sign when the Dow Transports are rising in sync with the Dow Industrials shown in Chart 1. That's why it's encouraging to see both Dow Averages ending the week back over their 200-day lines.
