As the current rally perpetuates beyond what reasonable technicians would have thought at this point - the buying surge has now surpassed 57 trading sessions, it would appear traders are searching rather intently for those "laggard" groups or stocks to provide them with enhanced risk-reward benefits. This is certainly reasonable we think for the theory is that they will eventually play "catch up" with the broader market as gains in other "high beta" groups are wrung out. To this end, we believe that the Pharmaceutical-Healthcare-Biotechnology groups offer just such a "catch-up" potential.
Our focus today is upon the AMEX Pharmaceutical Index/S&P 500 Ratio ($DRG/$SPX).Clearly $DRG has broken out against $SPX given the declining trendline breakout, with the ratio subsequently correcting lower in a reasonable fashion to "kiss" the breakout level. Thus far, this "kiss" has been successful, with the 20-week stochastic now at oversold levels - a circumstance that in the past with an increased probability of a rally developing. This time should prove no different, and if we had to forecast...we would believe that the highs near .33 would be taken out on any rally.
If we had to postulate two rather interesting individual stocks to be long, then we would look towards Abbott Labs (ABT); Sepracor (SEPR) and Cephalon (CEPH).
Good luck and good trading,
Richard
