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Scared of a Healthcare Tear?

May 17, 2011 7:51 PM ETLLY, BMY, PFE
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A strong start to the year is traditionally viewed as a good omen, but since March, domestic indices have established a sideways pattern with a few fake-outs to keep investors guessing. Trendless trends, however (when they persist for long enough),  sometimes look to make a leadership appointment. Which group has emerged as the leader of the directionless charge? Consumer staples? Well, yes. They're holding up pretty well. Also utilities with reliable dividends. But the shocker of the year has to be the rise of the healthcare stocks - a group that's resisted every rally and disappointed investors since Buffy the Vampire Slayer first contended with the forces of darkness.

Despite generally stagnant earnings and forecasts for more of the same, the likes of Bristol-Myers Squibb (BMY), Eli Lilly (LLY) and Pfizer (PFE) are leaving high-growth issues in the dust. PFE is up over 20%, while LLY has gained 10% for the year. Even BMY's gain of 8% year-to-date outpaces that of the S&P 500.

So what can we say about a market led by pharmacy stocks, where the financials have hardly raised their heads? Has the aging demographic finally aged long enough to bring an ailing sector back to life?

It's hard to love a market led by the healthcare group, where the stellar quarters of beta names are ignored. It's equally difficult to ignore the rise of big pharma shares after a decade of sub-par performance. Most remarkable of all, the pharmacy stocks seem set to subvert the busted myth of the 'defensive play'. As every investor soon learns, defense stocks don't so much defend as lose less and gain less as the market moves. Eli Lilly, however, along with Pfizer and Squibb, is actually doing what defense stocks are supposed to do. It's moved convincingly against the market since the downturn in February and appears poised to take out its 52-week high. And with an undemanding multiple of 8.9, LLY may have more upside than anyone expects.

The recent commodities rout and threat of a slowdown in China have left many investors looking for a place to hide. Whether we see a return or not to the risk-on trade, the market appears to have made its choice for risk-off. Now as always, traders will note when a stock moves against its index - even or especially if the market is stuck in a range or showing a general aversion to risk.

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