November 30, 2009

Health Care Sector vs Individual Issues

With Dubai in the news during the holiday, are any stocks still on the move?

The daily bar charts above plot the top two (top row, Johnson & Johnson left, Pfizer right, each in black) and bottom two (bottom row, Tenet Healthcare left, PerkinElmer right, each in black) securities by index weight against the Select Sector SPDR Health Care ETF (XLV in fuchsia). A blue vertical dashed line denotes the sector bottom from Mar 09, and color matching trend lines for each security are plotted. A 14 period relative strength plot (security vs sector) is shown in the sentiment area, and blue horizontal dashed lines mark price and relative strength points of interest.

A quick review of the sector rotation model (not displayed here) shows the XLV has risen sharply against the S&P 500 in the last 20 trading days (approximately 8.25% to 4.5%). This represents a potential accelerated shift to defensive names - not unexpected give the market news of the past week. The move has not been equal however amongst the top and bottom securities according to index weight. Indeed, the relative strength of the top two instruments remains above long term support, whereas the bottom two show signs of weakness breaking below (circled on each chart).

Quality has been the winner, but even quality takes a breather. Johnson & Johnson plainly broke ahead of the pack in Mar 09, rising far faster than the rest until pausing in a trading range (59.50 to 61.50) from Aug 09 - Oct 09. This consolidation resulted in a breaking of its uptrend line, but the sector itself remained strong. Despite a false break in XLV below its trend line in Oct 09, the sector remains in ascent. Pfizer also had a strong breakaway in Mar 09, but fell back in gear with the sector itself since, holding above polarity support near 16.50.

More speculative securities (based solely on index weight) have been somewhat of anomaly in 09. Tenet Healthcare lagged initially, and then rebounded to form a solid uptrend. That uptrend appears in question now, however, breaking below support near 5.00. Though it did not lag as badly, PerkinElmer looks poised to suffer a similar fate; if the stock can not remain above support near 18.50, a neckline break will complete a head and shoulders formation. With both securities clearly falling behind the index, a flight to quality appears to be in play.

We continue to remark that markets can remain overbought for significant periods of time. As the general state of the overall market continues to baffle many pundits, technicians should look for opportunities. If and when we approach a market top, it surely will not be obvious to the lay observer. Technicians, however, can use relative strength and sector rotation analysis to continue to position clients ahead of the overall market. Similar opportunities should be found in Utility sector in the weeks ahead.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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