Good Bet in Market Pullback: Health-Care Shares

By GEOFFREY ROGOW As sentiment and the stock market increasingly look bearish, look for the recent outperformance in health care to continue. In the initial run of stocks following the March lows, health-care firms were hardly a leader. Given their defensive posture, many fared much better during the market's plummet and thus didn't receive the snap-back buying that occurred in more cyclical areas. From there, much of the market's gains were led by more rosy economic sentiment globally and a heavy bet against the dollar, both of which fueled big rallies for energy and materials companies, but did little to health care. Last week, however, health care was the one exception to a sliding market. The Dow Jones Industrial Average lost 3%, and the Standard & Poor's 500 slid 2.7%, but the NYSE Arca Pharmaceutical Index finished in the green, including a 4% gain for the last four days. And on Monday, even with the S&P 500 closing off an additional 3.1%, the NYSE Arca Pharmaceutical Index fell only 1.8% to 258.33. "It's been rallying on positive momentum and a rotation back into more defensive areas of the market," said Katie Stockton, chief market technician for MKM Partners. "That will continue through a correction phase likely to benefit large-cap pharma." In the midst of last week's gains, Ms. Stockton notes the pharmaceutical index confirmed a breakout by moving above its 200-day moving average, though the index hasn't yet broken above its January high of 277.23. Within the index, which has 15 components, she says leaders are likely to be Sanofi-Aventis and GlaxoSmithKline. Both firms also have recently moved above their 200-day moving averages, while Pfizer hasn't. Ms. Stockton says it is likely most of the health-care sector will outperform and not just large pharmaceutical companies. Areas such as health-maintenance organizations, or even biotechnology firms, will outpace the broader market, a sentiment echoed by Christian Bendixen, director of technical research at Bay Crest Partners. For the broader market, Mr. Bendixen sees a lot of pain ahead, with a fundamental trigger likely to push the S&P 500 back below its March lows by the end of this year or even in early 2010. "We think once this fall really accelerates, there will be very few places to hide," Mr. Bendixen said. "Our general recommendation is that the only asset classes to be long would be the dollar and Treasurys." As for stocks, Mr. Bendixen recommends a staunch defensive posture, with health care and large technology firms among the sectors he expects to outperform. But he would shy away from consumer staples, adding "a lot of the individual names in that sector look pretty weak to us." Write to Geoffrey Rogow at geoffrey.rogow@dowjones.com