“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
All information contained herein and any opinions expressed in it are intended solely for the use of customers of Elgin AMC (“Elgin”). This document is not, and should not be construed as an offer or solicitation to buy or sell any product, security or any other financial instrument. Any opinions expressed in this document are subject to change in that notice. This information is a marketing communication for the purpose of the European Markets in Financial Instruments Directive (MiFID) and CySEC’s Rules. It has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research. This document is not based upon detailed analysis by Elgin of any, market, issuer or security named herein and does not constitute a formal research recommendation, either expressly or otherwise. It is not investment advice and does not take into account the investment objectives and policies, financial position or portfolio composition of any recipient. This document should not to be relied upon as authoritative or taken in substitution for the exercise of your own commercial judgment. This document has been prepared on the basis of economic data, trading patterns, actual market news and events, and is only valid on the date of publication. Elgin does not make any guarantee, representation or warranty, (either expressly or impliedly), as to the factual accuracy, completeness, or sufficiency of information contained herein. This document has been prepared by the author based upon informational sources believed to be reliable and prepared in good faith. Elgin does not make any representation or warranty, express or implied, as to the accuracy, completeness or correctness of this information. Elgin does not accept any liability for any loss or damage, howsoever caused, arising from any errors, omissions or reliance on any information or views contained in this document. The value of any securities mentioned in this document may move up or down, and the value of securities denominated in other currencies will also be subject to fluctuations in the relevant exchange rates. Securities issued in emerging markets are typically subject to greater volatility and risk of loss. Elgin’s officers, directors and employees may own or have positions in any investment(s) mentioned herein or related thereto and may, from time to time, add to or dispose of any such investment(s). This information is the intellectual property of Elgin. Redistribution or dissemination of this document is prohibited.
Elgin AMC is a trading name of Numisma Capital Ltd. Numisma Capital Ltd is regulated by the Cyprus Securities and Exchange Commission (CIF licence no. 122/10) Additional information from Elgin AMC is available upon request at email@example.com