OK folks, I am never one to take things at face value. It is my job to look under the surface of the market headlines and all of the euphoria to find situations that may give a healthier perspective. Usually, stepping back and questioning things is good. Before I go any further I want to make it clear that I am not advocating anything other than going along with the rally here. The buying is relentless and anyone who shorts here is really asking for trouble. In fact, this type of buying leads to blow off tops which means we should reach the projected targets of 1230 on the S&P and 11,300 on the Dow by the end of summer.
With that said, I will present a relationship that is not behaving 'normally'. Below is a chart of the IBB:SP-500 spread plotted along with the price of the S&P 500. The spread is the black line and the S&P 500 is the red line. When the spread line is rising, that means that IBB is outperforming the S&P. That does not necessarily mean that IBB is rising and the S&P is falling, it simply means that IBB is faring better (i.e. they could both be falling, just that IBB is not falling as fast). This gives credence to the belief that biotech is more of a defensive play during tough economic times because revenue sources for biotech is usually from grants. donations, etc. that are less affected by a weak economy.
You will see that when the S&P is performing well (the red line is rising) that the spread suffers as money rotates out of defensive names and into higher risk equities. The spread bottomed in July 2007, giving ample warning that there was trouble ahead for equities as the smart money began rotating into defensive names. The spread continued to meander sideways until the spring/summer of 2008 when things really began to break down in the market. IBB held up much better than the S&P as prices came crashing down into March 2009. Now notice how the spread topped in February - a couple of weeks before the market actually bottomed. That showed that money had begun rotating out of defensive names and back into riskier names as the market finally bottomed on March 6 - 9.
So why am I posting this chart? Look to the right side of the chart and notice that since May, the spread has outperformed the S&P, and it continues to move higher right alongside the S&P even as it has pulled out of its July low. This - along with today's upside breakout in XLP (consumer staples) over its January high - says that there is still a large amount of funds flowing into defensive names. Once this buying runs its course, we could be in for another ugly slide, but for now, stay long.