foxex: Healthy Bounce

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Wednesday, December 04, 2019

1. Finance and healthcare sectors lead as stocks rebound

2. Healthcare sector rebound is surprisingly robust

3. The best industry groups within the healthcare sector

Market Moves

Stocks continued their rebound led by healthcare and financial sector stocks. The S&P 500 (SPX) and Nasdaq 100 (NDX) rose by just over one-half percent on the day. The financial and healthcare sectors closed nearly one percent higher, however, demonstrating relative strength. Of these two sectors the healthcare sector performance is more notable.

When upward trending markets pause to dip, it is useful to note which sectors are rising fastest out of the recent lows. This price action belies the actions of professional fund managers as they rotate their investment choices. In an attempt to take advantage of the opportunities their research suggests, they tend to cluster their choices in what they consider more favorable industry groups or sectors.

The chart below details how the healthcare sector, tracked by State Street's Healthcare ETF (XLV), has risen from the bottom of the ranking to nearly the top. This is a relatively stronger performance since October 1st, the start of the fourth quarter, than any of State Street's other sector ETFs including Financial (XLF), Technology (XLK), Industrial (XLI), Basic Materials (XLB), Energy (XLE), Staples (XLP), Discretionary (XLY), and Utilities (XLU).

Healthcare Sector Rebound is Surprisingly Robust

Another strong indication that the healthcare sector is being aggressively pursued by investment managers is the relative performance over the past 15 trading sessions. The chart below provides an interesting closeup of this action. Looking at this chart you can see two things worthy of note: (1) the sector does not dip as low as the broader market, and (2) the sector fully retraces its pullback in only two sessions, where the broad market index has only retraced about half of its move. The importance of this is that even after two months of strong performance, buyers are still enthusiastic about participating in this sector.

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The Best Industry Groups within the Healthcare Sector

If professional investors controlling large amounts of money are willing to flock towards the healthcare sector, an astute chart watcher might be able to spot relevant opportunities by looking one more layer deep. This sector has many ETFs that track the industry sectors within it. The chart below compares some of the more actively traded ones, including iShares' Nasdaq Biotechnology ETF (IBB), U.S. Healthcare Providers ETF (IHF), and its U.S. Medical Devices ETF (IHI), as well as Invesco S&P 500® Equal Weight Health Care ETF (RYH), and its SmallCap Health Care ETF (PSCH), and rounded out with State Street's Health Care Equipment ETF (XHE).

Two important observations here are that the biotechnology sector is leading, and that the small cap stocks within the sector are also leading the average. This matches the move in small cap stocks in the market at large.

The Bottom Line

Stocks continued to rebound today led by the financial and healthcare sectors. The healthcare sector move is impressive because it seems more robust and has the potential to continue. Within the healthcare sector, small cap stocks and biotechnology stocks seem to be leading the charge, showing relative strength over the past three days.