Healthy Rotation

Outperforming only Energy stocks, Health Care is the second-worst performing sector this year. Last week, though, saw Health Care rise 2%, more than any other sector. Could that be a sign of more strength to come?

Here’s Health Care relative to the S&P 500 over the last 5 years. The ratio peaked in mid-2015 and declined for the next 18 months. That December 2016 low has since been excellent support.

In September, we saw that level get tested once again, and once again, the level held. Momentum diverged positively at the lows, and now the ratio is trying to break the downtrend from June. To be sure, the sector is still in a downtrend for the year, but this is a logical place for a big turn higher.

On an absolute basis, Health Care is coiling up for what could be a major move. 

Prices have gone exactly nowhere since January 2018, but momentum did manage to stay out of oversold territory on the most recent decline. If we see a break of the downtrend line, the 261.8% extension from the 2015-2016 decline is easily within reach. On the flip-side, a resolution lower would need to hold $1000 or risk going all the way back to the 2015 highs.

For the last few years, Health Care has been led by both Equipment and Supplies, and Life Sciences. The former is still in a clean uptrend.

Midway between extensions from the 2015 decline, prices have consolidated over the past few months. New highs are only one good day away, while it would take a drop below $1500 to do any real structural damage to the chart.

Life Sciences has been almost as strong, but a false breakout in June followed by momentum falling into oversold territory warrants bit more caution.

The industry has been prone to false starts over the past 5 years (2016, 2018), but has continued to stair-step higher. A move back above resistance at $650 would suggest more highs are in store. A failure here would put momentum in a bearish range and make $575 a critical level for keeping the long-term uptrend intact.

If we’re going to see Health Care as a whole lead the market, though, we’ll need some help from other, larger, industries. Biotech might be the best hope.

Biotech held the December 2018 low during a July retest, and momentum stayed well out of oversold territory during the decline. Now, prices are breaking a year-long downtrend line and trying to get above the 200-day moving average. 

There’s nothing here to indicate we’re going to break out of the 5-year range, but with the upper end of the channel about 20% away, there’s plenty of room headroom. Especially compared to pharma.

Pharmaceuticals stocks continue to hold the area around $650. There’s plenty of support there going all the way back to 2015, but the last few years have been a choppy mess.

Over the past few weeks, the group has set some higher highs and higher lows, signaling a potential move back to the high end of the range. Unfortunately, the high end of the range is only 5% away – probably not enough to move the needle for the whole sector. Positive momentum readings should be supportive, but prices have to get back above $710 before we can get too excited about longer-term prospects.

The final industry, Health Care Providers, is stuck in a consolidation as well.

Compared to Pharma, the Providers had a less-robust bounce in June and July, and have been setting lower highs since late last year. Support at $800 held in August, and momentum stayed out of oversold territory, but these stocks are rangebound until they aren’t.

To sum it up, Health Care on a relative basis is at a logical place to begin outperforming. The sector has coiled up for a major breakout, and three consolidating industries will decide the fate of the group as a whole.  Biotech, Pharma, and Health Care Providers are all near the bottom end of long-term ranges – poised for either a bounce or a major resolution to the downside. Meanwhile, Health Care Equipment and Life Sciences have led the sector for much of the last 5 years and remain in uptrends.

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The post Healthy Rotation first appeared on Grindstone Intelligence.