After a higher open for stocks, we've started to see some technology stocks come under selling pressure and dip into the red. This morning, Merrill Lynch came to the table with a call for investors to book profits in technology and rotate some capital to the drug stocks as the firm feels that drug stocks represent good value and that 4th-quarter appreciation and valuations for technology stocks are at "bubble-like levels."
Pharmaceutical Index Chart - Daily Interval
This morning's "call" from Merrill Lynch has some technical merits too. The DRG.X has been consolidating near retracement of $372 for the past couple of months and provides a bullish trader in the group some good technicals to be keeping an eye on. While we've been more bullish on the "healthcare" stocks like Oxford Health (NYSE:OHP) and Unitedhealth (NYSE:UNH) in recent weeks, the drug sector looks to be finding some buyers that is providing support for the index.
On Friday, I received e-mail from a subscriber regarding shares of Forrest Labs (NYSE:FRX). This is a stock that attendees of the 2001 Spring Option Investor Expo will remember us talking favorably about. On Friday, I felt that FRX was a clear leader in the sector, but felt the stock really need some group sponsorship (better upside performance) to get shares of FRX moving to new 52-week highs. We'll try and work on other names with a "drug" theme that look to be gaining favor if Merrill's call begins to pan out. Sector strength is very important when making stock/option selection and if the sector "heats up," the stronger names like Forrest Labs (FRX.X) should be the better performers.
In recent weeks and months, we have also been alerting subscribers to the "overbought" condition of the NASDAQ-100 bullish percent and to have actually been booking some profits or at least snugging stops under their technology stocks. As of Friday, the NASDAQ-100 bullish % ($BPNDX) from www.stockcharts.com has fallen to 46% from a higher reading of 78%. Subscribers will remember that a reading above 70% is considered "overbought," while readings below 30% are considered "oversold." I will also note that today's trade at $38 in the QQQ's is a double bottom sell signal on the point and figure chart and should have traders playing further defense in many technology stocks.