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To: Gut Trader who wrote (51471)	12/27/2000 1:35:56 AM
From: jj_	Read Replies (1) \| Respond to of 436258

fwiw;somewhat interesting with GW's latest cabinet pick from LLY... schaeffersresearch.com The AMEX Pharmacuetical Index Pushes Higher 12/26/2000 5:32:49 PM The AMEX Pharmaceutical Index (DRG – 438.6) is a capitalization-weighted index designed to represent a cross section of widely held, highly capitalized companies involved with various phases of the pharmaceutical industry. The index was developed with a base value of 200 on July 31,1991 and split two-for-one on March 23, 1999. The DRG gained as many pharmaceutical stocks showed significant strength on an otherwise nondescript trading day. In today's trading, many members of the DRG (and some pharmaceuticals stocks that are not) gained more than three percent. These include Forest Labs (FRX – 127-5/16), up 5.2 percent and American Home Products (AHP – 61.90), up 3.2 percent. Additionally, generic drug makers Baxter International (BAX – 85-7/16) and Barr Laboratories (BRL – 74-3/16) are each up more than two percent. A closer look at the sentiment surrounding many of the drug names yields an interesting picture. First, the overall sentiment on the DRG continues to be quite pessimistic. The Schaeffer's put/call open interest ratio (SOIR) for the sector currently stands at 0.56, higher than all but 19 percent of all readings over the past 52 weeks (see the first chart). What's more, the SOIR has been rising in a pattern of higher highs and higher lows since making a 52-week low at 0.44 near the DRG's short-term bottom in mid September (see the second chart). While it is not unusual (or particularly enlightening) to see pessimistic sentiment on downtrending sectors, it can be telling when such pessimism exists on a strong sector. This type of misplaced pessimism on the DRG has contributed to a rally that has brought the index to new all-time high levels. Such pessimism on pharmaceutical stocks suggests that even though the index has rallied nearly 19 percent over the past four months, more buying power exists on the sidelines in the form of those who have yet to capitulate to the trend. Chart courtesy of ILX Systems Chart courtesy of Schaeffer's Daily Sentiment Another interesting factor that illustrates the growing pessimism in drug names is the increase in short interest on many of the sector's best performers. Short interest represents shares that have been borrowed at a certain price and then sold. Short sellers hope that a stock will drop and they then can buy back or "cover" the shares at a lower price, then deliver the stock back and pocket the difference as profit. The larger the total short interest, the more potential buying power is sitting on the sidelines. In the event that the share price starts to appreciate very rapidly, traders may be forced to cover their short positions because of margin requirements or to prevent losses from getting out of control. This in turn creates more upward price pressure, which forces even more short positions to be covered. This phenomenon is called a short-covering rally and will sometimes happen to stocks with a large amount of short interest. Short interest increased significantly on many drug names between November 15 and December 15. Some of the biggest increases were found in some of today's strongest performers. BAX saw an increase of 389.7 percent in its short interest. Other drug names with large short interest increases include FRX, +80.2 percent; LLY, +56.3 percent; and AHP, +32.9 percent. It is this pessimism on an outperforming group of stocks amid a weak market environment that helps to explain today's strong performance. - Richard A. Sparks (rsparks@sir-inc.com)