Which Stock Index is Leading in 2008?

This January is being reported as one of the worst January starts in the stock market in over fifty years. Some stock portfolios are down between seven to ten per cent already. So how does one figure out what stock index will lead going forward for 2008? One way you can look at this is to see what stock index (industry) has been performing the best to date in comparison to the four to five per cent sell off in the Dow Jones as to date. There is one stock index which is leading in performance. It is the Drug index with a gain of about four per cent. The Drug index is considered one defensive area when there is a recession. Let's face it, people still get sick and need their prescriptions whether there is a recession or not. So, as long as, a recession appears to be on the horizon, they should be able to continue to outperform. Any defensive sectors like consumer staples, healthcare, or utilities also do well in a recession because these are the necessary areas people have to spend in whether it is a recession or not. Furthermore, if there is no recession, well, then the money could flow back into technology or other growth areas. It is something to keep an eye on.

One way to play this Drug area is to buy an ETF in the Drug Index. An ETF is a basket of stocks in that index. The ETFs I'm referring to are

- Pharmaceutical Holder(PPH)
- Spider Pharmaceuticals (XPH)
- iShares Dow Jones U.S. Pharmaceuticals (IHE)
- PowerShares Dynamic Pharmaceuticals (PJP)
- iShares S&P Global Healthcare (IXJ)

Giving you some technical analysis (click here for a chart) on these ETF's in comparison to the Dow Jones Industrials and the S&P 500 index, you can see which ETF is leading - XPH which is the Spider Pharmaceuticals. All of the ETF's are outperforming the overall stock market. However, when you use this type of technical analysis you can find the ETF which is outperforming for now all the rest.

You can bookmark this link.http://stockcharts.com/h-sc/ui if you wish to follow these symbols for important breakdowns in the market. If the S&P 500, symbol $spx, breaks August's lows of 1370.06 and a close at least two times below 12,500 on the Dow, symbol $indu, you might be saying "welcome to the bear market". As Art Cashin on CNBC says, if we break our August lows, then "Goldilocks might have to by pass Dr. Phil and go to see Dr. Kevorkian." One important note here the Dow has a long term support which goes back to the year 2000 at 11,700. This means, if that breaks down, then the economy is worse than we think.

We have had some important news for January 15th which was Citi Group's loss of 10 billion dollars and slashing dividends and jobs.
Then we have a consumer inflation report, PPI, that showed the consumer continues to slow down purchases because of the rising cost of food and energy. This PPI report was the worst sign of inflation since 1981!

We are now approaching earnings season. The question will be "Is all the bad news factored into the market?" It is possible some companies could have upside surprises due to the weak dollar. It could be relative to whether they have overseas exposure with their cheap dollar parts or services that they may sell. Later this month on January 30th, we do have a Federal Reserve meeting to decide how much of a rate cut we will get. As I write this article the market is pricing in a 50 basis point cut. Stay tune for more updates.

Please do your own due diligence when investing. There are never any guarantees of performance.