Dobosz, 09.09.05, 12:00 PM ET
In what could be viewed as a negative development for the overall market, one of the classic defensive sectors--health care--is outperforming the rest of the market. Broad baskets of health care stocks are hitting new multiyear and all-time highs, led by breakouts in biotechnology and a big move higher by pharmaceuticals, proving that you can play offense even in defensive positions.
Health Care Select SPDR (amex: XLV), an exchange-traded fund, closed at an all-time high of $32.32 on Sept. 7, on two and a half times average volume. The ETF is up 7.7% for the year, driven higher mostly by strong returns in managed care and biotechnology.
But now the once-laggard pharmaceutical stocks are showing strength too. The Pharmaceutical HOLDRs (amex: PPH) is up 4.7% since bouncing off of mid-March support at $70 two weeks ago. Gains in Schering-Plough (nyse: SGP - news - people), Wyeth (nyse: WYE - news - people), Johnson & Johnson and Pfizer (nyse: PFE - news - people) are leading that ETF above its 50- and 200-day moving averages.
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The recent strength in health care, however, could bode ill for the bull market, says veteran technical analyst John Murphy, who is chief technical analyst at Stockcharts.com.
Murphy uses a three-year chart of the XLV alongside the ratio of the XLV to the S&P 500 Index, providing a measure of health care's relative strength. When it rises, the implication is bearish for stocks. "Their relative strength ratio rises when the market is weak and falls when the market is strong," says Murphy. "The fact that it's been rising for most of 2005 is a sign that money is moving into more defensive sectors in an aging bull market--another reason why health care is an attractive choice right now."
A seven-year chart illustrates how health care and the broad market trend in opposite directions. "The purple line is the S&P 500," says Murphy. "The green line is a ratio of the XLV divided by the S&P 500. The green ratio line bottomed at the end of 2000 as the S&P 500 was peaking. The XLV/S&P ratio peaked in the fourth quarter of 2002 as the S&P 500 was bottoming."
For Murphy, the message is clear: Get defensive now that the cyclical bull market looks to be in its "final phase."
From The Chartroom