Friday, September 11, 2009

Feelin’ healthy

Lost amid the percolating anticipation investors have placed in the market’s advance is the quiet rehabilitation of health care stocks. Gold and oil stocks are under increasing pressure to bust loose, a trader’s dream – but investors should take a good look at the reassuring trends in a defensive sector that has its own building steam. U.S. health care stocks have been trending positively with the rest of the market since the March market bottom, despite the polarizing political debate about health care insurance in America. Only the financial sector, itself coming off life-support, has performed better than healthcare stocks over the past three months. The health sector promises leverage with its stable of biotech and pharmaceutical stocks, yet generally offers investors defensive cover in the event of a market reversal. Obamacare or not, the stock market is grabbing on to some traditional health care anchors.

During the bear market of last year the S&P Healthcare Index showed its relative price performance over the broad market through the last half of 2008 until the market bottomed in March of this year. When the financials took the market in a tailspin, health care stocks sank with the rest of the market – just not so badly. That is the desired outcome for a defensive sector: relative price performance. But now pharmaceutical stocks, north and south of the border, are showing a performance premium in a bull market. Almost all of the big cap pharma names are in Stock Trends Bullish trends and outpacing the S&P 500 over the recent summer months. Even with its massive acquisition of Schering-Plough Corp. (NYSE:SGP) in the works, Merck & Co. (NYSE:MRK) is up 18% since early June; and Pfizer Inc. (NYSE:PFE) is up 13%, a tidy vote of market confidence that was good cover for the company’s recently announced details of its $2.3-billion settlement of criminal charges. Investors can feel good about pharma’s solid footing in the current market environment.

The Health Care Select Sector SPDR (NYSE:XLV) represents the 13.4% weighting of health care stocks in the S&P 500 and is the most actively traded exchange traded fund in the sector. The next most transacted health care portfolio is the Pharmaceutical HOLDRs (PPH-N), which generally has less than 10% of the number of transactions XLV logs in every week. There are other funds specialized in biotech, medical devices, and healthy services, as well as leveraged Rydex health care ETFs, but XLV is the liquid center of investors’ broad exposure to the group. However, four key big cap pharma stocks account for 34% of the weighting of the fund – Johnson & Johnson (NYSE:JNJ), Pfizer, Merck, and Wyeth (NYSE:WYE). Wyeth is the best performer of the group – hitting new 52-week highs at the end of August – but all of these important stocks are currently in bullish trends, with both JNJ and MRK poised to rally off trend line support.

Stock Trends Bullish since early July, XLV has been quietly advancing along its price channel, making new 2009 highs during the summer as the U.S. health care political debate heated up. The ETF’s price pattern could see the sector add another 10% in the third quarter, especially as Congress works toward clearing uncertainty about health care insurance reform. The bullish trend of the sector indicates that investors are betting on calmer heads prevailing, and are looking for further upside if the broad market continues to advance. If a market correction is instead forthcoming, health care stocks should still be a good play.

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