HEALTHCARE IS YEAR'S SECOND STRONGEST SECTOR -- IT ALSO OFFERS GREAT VALUE -- THE BEST HEALTHCARE VALUE NOW LIES WITH BIOTECHS AND PHARMA -- BIOTECH ISHARES ARE BREAKING OUT TO UPSIDE -- PHARMACEUTICAL ISHARES SHOULD BE NEXT
HEALTHCARE IS GETTING A LOT STRONGER ... I continue to believe that healthcare is one of the best values in the stock market. And it's attracting a lot of investor attention. Chart 1 shows the Health Care SPDR (XLV) trading at a new record high after clearing its mid-2015 peak. Its relative strength line (top of chart) is trading at the highest level since last November. The healthcare sector has gained 15% during 2017, making it the market's second strongest sector behind technology's gain of 16%. During June, however, healthcare has continued to rise while technology has lost ground. What I find especially appealing is how low the XLV/SPX ratio is on a two-year basis (green circle). That's because the XLV spent most of the last two years consolidating while the market kept rallying. As a result, the XLV/SPX ratio presents unusual value. Healthcare and financials benefited from the rotation into value stocks this month as tech shares slumped. Financials, however, are being held back by falling bond yields. Financials have also lagged behind healthcare by a 15% to 5% margin since the start of the year. That makes healthcare a stronger value bet than financials.
(click to view a live version of this chart)
Chart 1
NOT ALL PARTS OF HEALTHCARE ARE EQUAL ... My previous messages on the reviving healthcare sector have pointed out that not all parts of healthcare are rising equally. Chart 2 shows three healthcare ETFs that have led the sector higher during the first half of the year. They include Medical Devices iShares (25%), Healthcare Equipment SPDR (21%), and Health Care Providers iShares (16%). My April 27 message highlighted medical devices as the strongest part of healthcare along with several standout stock performers. For newer investors in healthcare, however, those leading groups no longer offer the best value in the sector. That role now belongs to biotechs and pharmaceuticals.
Chart 2
PHARMACEUTICAL ISHARES NEAR UPSIDE BREAKOUT... Pharmaceutical stocks have been the weakest part of healthcare during 2017 (10%). But they're about to take big turn for the better. Chart 3 shows U.S. Pharmaceuticals iShares (IHE) on the verge of breaking through a "neckline" drawn over its August/March highs. Its relative strength (top of chart) may be bottoming as well. That should attract new healthcare money from chartwatchers. Biotechs look even stronger.
(click to view a live version of this chart)
Chart 3
BIOTECH ISHARES ARE ALREADY BREAKING OUT... Chart 4 shows the Biotech iShares (IBB) breaking out today to the highest level in eighteen months. Its relative strength ratio (top of chart) is starting to turn up as well. Biotechs and pharma are just starting to rally and may present the best values in the healthcare group. Their new strength should give an added boost to the entire sector. Healthcare is the only sector in the black today in a market being weighed down by falling energy shares.
