On
Monday (Jun. 16) we also looked at the short-term directional indicator for the
biotech/pharmaceutical stock group. We
saw that this important leading indicator was signaling an upside breakout for
the NYSE Pharmaceutical Index (DRG).
After a spate of mergers and takeover bids earlier this year, the
drugs/biotechs spent the last several weeks cooling off with biotechs suffering
the bigger correction.
Until
recently, weak internal momentum prevented the drug stocks from participating
in the latest broad market rally. As the
short-term directional indicator correctly predicted, however, drug and biotech
stocks broke out to higher levels this week.
Below you can see the move to new yearly highs in the DRG.
The
iShares NASDAQ Biotech ETF (IBB) meanwhile was up some 2% on Friday and is now
challenging the March highs. This has
great psychological important since the financial press has focused heavily on
IBB in the past several weeks, using it as an example of Wall Street’s
bearishness on the industry. The renewed
upward trend in DRG and IBB shows just how much that psychology has changed
from negative to positive in just the last couple of weeks.
The
surge in the drug and biotech stocks is important since it has provided an
additional impetus for the broad market to maintain its upward course. As I wrote in Monday’s report, it should
allow the market to “keep making higher highs this month before a potential
(and expected) volatility increase later this summer as the yearly cycles
bottom.”
[Excerpted
from the June 20 issue of Momentum Strategies Report]
