“The most bullish thing a market can do is get overbought and stay that way.” So said Alan Shaw, the legendary former head of technical analysis at Smith Barney. While health care stocks have been overbought for some time now, their uptrend continues to impress without signs of exhaustion.
The Select Sector Health Care ETF (ticker symbol XLV) has been overbought for quite some time and that has not stopped it from breaking recently above its previous highs. It is worth noting that only 3 sectors managed to report new highs over the last month and the health care sector was one of them.
The really impressive performance of the sector however is when it is compared to the broader market. Our Relative Strength chart below shows that health care has consistently outperformed the S&P 500 since 2011. The numbers are even more impressive. Since the beginning of 2011 health care has outperformed the S&P 500 by 44% and the technology sector by 46%.
So what’s behind the stellar performance of this sector? After all due to its defensive nature health care is supposed to underperform when the stock market is rising and outperform when the stock market is falling. The truth however is somewhere in the middle. The health care sector has both defensive and growth characteristics. On one hand we have the pharmaceuticals, health care services and equipment industries, which are considered defensive in nature and on the other we have biotechnology, which is well known for its growth and speculative nature. The chart below shows that biotechnology has been an important driver behind health care’s performance.
There is a lot of talk about Biotechnology being the next bubble. Even Fed Chairwoman Yellen made a reference to biotechnology small caps that have stretched valuations. While there are arguments on both sides, we would repeat Alan Shaw’s comment: “The most bullish thing a market can do is get overbought and stay that way.” Biotechnology bubble talk has been all over the media for over a year now and yet stock prices have been climbing higher. As always the million dollar question is how high is high?
Health care might have been overbought for some time now but the trend is still healthy both in absolute and relative terms. Investors who are interested in the sector have many choices available through low cost exchange traded funds. The most popular and liquid one is the SPDR Health Care Select Sector fund (XLV). Speculative investors who would like exposure to the biotechnology industry, should consider the iShares Nasdaq Biotechnology ETF (IBB).
Costas Pierides CFTe, MSTA
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