Drug Stocks Often Trade in a Pack, but Not Now. Here Are Leaders and Laggards

Will the U.S. economy experience a hard landing, a soft landing, or no landing this year? Regardless of the state of the economy, Americans will continue to consume their prescribed medications. This gives the pharmaceutical sector an edge, no matter what 2023 holds in store.

Viewed as a whole, pharmaceutical stocks have been quiet recently. Over the past six months, the S&P Pharmaceutical SPDR (XPH) , a proxy for the sector, has moved sideways in a range between $38 and $45.

Source of charts: TradeStation

Since the beginning of the year, pharmaceutical stocks have traded in line with the broader market. XPH (green) has underperformed the SPDR S&P 500 ( (SPY) , blue) by just one-quarter of a percentage point year to date.

While the pharma sector has closely matched the moves in the broader market, there is considerable divergence among individual names. One of the better charts in this group belongs to Merck & Co. (MRK) .

Merck is down just 1.29% since the start of the year after gaining 30.92% in 2021 and soaring 44.77% last year. In 2022, Merck outperformed names such as Apple (AAPL) , which lost 26.83% last year.

What’s next for Merck? The stock just formed a bullish engulfing pattern (shaded yellow). That pattern was accompanied by an uptick in volume (arrow) and a close above Merck’s 50-day moving average (blue). According to the charts, this stock is likely headed to another all-time high.

While Merck has an outstanding chart, Novo Nordisk (NVO) looks even better. The 100-year-old, Denmark-based pharmaceutical giant is sharply focused on diabetes.

Novo Nordisk is climbing in an uptrend and is getting strong support from its 50-day moving average (blue). The stock is just 1% from a fresh all-time high.

Compare Merck and Novo Nordisk to Johnson & Johnson (JNJ) , which has been trending steadily lower since the start of the year. J&J has lost 9.18% year to date and reached its lowest price in nearly a year last week.

Like Merck, this stock formed a bullish engulfing pattern last week (shaded yellow). However, J&J’s 50-day moving average (blue) recently crossed below its descending 200-day moving average (red), generating a bearish signal known as a “death cross” (arrow).

Another troubled name in this sector is Eli Lilly & Co. (LLY) . Last week, Lilly closed below its 200-day moving average (red) for the first time in 12 months.

Here’s what the charts are telling us: Rather than trading in a pack, as has often been the case in the past, pharmaceutical stocks have split into two distinct groups. Investors need to re-evaluate their holdings in this sector because winners such as Merck and Novo Nordisk are likely to continue to outperform their peers in 2023.