Taking the Temperature of Health Care

Watch this sector, as it's a good tell among defensive groups.
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This column was originally published on RealMoney on Nov. 8 at 3:44 p.m. EST. It's being republished as a bonus for TheStreet.com readers.

Thankfully, the election hype is almost over. Everyone's now talking about who will control what, how it will affect the market and which sectors and stocks are poised to benefit.

Let me make it easy for investors to determine what will work and what won't: Watch what the market has to say over the coming weeks. By paying attention to the sectors in the market, you'll get a feel for where the institutional money will be flowing. That's all you'll need to know.

Before I get to one sector I'll be watching, I want to mention that the latest Commitment of Traders report was released late last week. It showed another increase in the "smart money" commercial net short position.

The positions are now truly at an extreme: The current $39 billion hedge against a market rally is now the second-largest in history, behind $40 billion on March 6, 2001, after which the

S&P 500

lost 11% over the next month. As Jason Goepfert over at Sentiment Trader says, "This has been a yellow flag for a couple of weeks, but that flag is quickly turning bright red."

Everyone knows how extended this market is, but trying to call a top can be an expensive venture. However, pay attention to the professionals who are the closest to the action.

That's why I'm highlighting the health care sector today. Its relative strength usually rises when the market is weak, and falls when the market is strong. However, it has remained in a strong uptrend along with the S&P 500. Since the market's small correction in June and July, the health care sector has outperformed the S&P 500 by several percent.

That demonstrates the defensive nature shown by market professionals as the market continues to rise. The fact that health care has been in a strong uptrend signals that money is moving into more defensive sectors as the risk of a correction increases.

Although most of the stocks in the sector are in a strong uptrend, they are due for a correction. We will have to watch the support areas on the charts. If they are broken on high volume, it may signal that institutions are rotating out of this sector and back into higher-growth areas, which would be good for the general market. If they hold support and start to move back up, then a new leg up in the sector will be a good bet. That would indicate that institutional investors are remaining cautious.

Health care, as represented by the

Healthcare Spyder Select

(XLV) - Get Report

, has been in a steady stair-step climb since July.

It has recently held its 50-day moving average after it eclipsed all-time highs a few weeks ago. At this point, it looks like it might be heading higher, but it is certainly due for some type of consolidation or correction. A retracement back down around $32 may provide a much-needed rest.

Pharmaceutical HOLDRs

From an intermediate-term view,

Pharmaceutical HOLDRs

(PPH) - Get Report

have exactly the same type of pattern. However, from a longer-term view, it's a long way from making new highs. It would have to climb almost 40% to achieve that.

From this point, there may be some upside testing, but I think it will need to work off some excess before forming a new leg higher. A move down to the $74 area is a possibility.

Now, let's take a look at some individual names.

Johnson & Johnson

Johnson & Johnson

(JNJ) - Get Report

is close to making all-time highs. But before that happens, I suspect it may need to work off the recent "V" formation. Johnson & Johnson could even drop down to $66 without doing any damage to its uptrend. That may actually be healthy for the stock before it tries to take out the new highs.

Pfizer

Pfizer

(PFE) - Get Report

continues to lag behind the performance of Johnson & Johnson and is far from reaching the old highs of $49.99 set back in April 1999. After the recent correction in October, the stock continues to struggle under the 50-day moving average. A further correction back down to the $25-$26 level would not be out of the question.

Schering-Plough

Schering-Plough

(SGP)

has been undergoing a restructuring process for quite some time now, and it is also way off its old all-time highs. However, it is making progress, as it recently set a new four-year high. The stock has become somewhat extended, and I would expect some type of correction or consolidation sometime soon.

Wyeth

Wyeth

(WYE)

has also been a strong stock performer since July. Over the past few weeks, it has retraced to the 50-day moving average and has held that level. The Oct. 19 reversal shown in red is of some concern, as more of a correction may be ahead. A drop back down to the $48-$49 level is possible. If that happens, it will be crucial that it holds at $48.

Keep a close eye on the health care sector, as it indicates the expectations of institutions and whether they'll remain defensive. It may also provide investors with a profitable vehicle to navigate through rough waters if the market turns volatile in the coming weeks.

At time of publication, Manning had no positions in any of the stocks mentioned in this column, although holdings can change at any time.

Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback;

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