CONSUMER CYCLICALS AND TECHNOLOGY ARE THE YEAR'S STRONGEST SECTORS -- BUT HEALTHCARE HAS BECOME THE NEW MARKET LEADER -- AND REMAINS MUCH CHEAPER THAN THE OTHER SECTOR LEADERS
HEALTHCARE HAS BECOME NEW SECTOR LEADER... The three strongest sector leaders since the start of this year have been consumer cyclicals, technology, and healthcare (in that order). But those numbers don't reflect the fact that healthcare has become the strongest market sector over the past three and six month periods. In other words, healthcare is the new market leader. The three relative strength lines in Chart 1 represent consumer cyclicals (blue line), technology (red line), and healthcare (green line) since the start of 2018. All three are plotted against the S&P 500 Index (flat line). So their rising lines represent strong "relative performance". The two top lines have clearly been the top performers since the start of the year. Since May, however, the healthcare relative strength ratio has risen much faster than the other two. Since its May bottom, the healthcare sector has outperformed consumer cyclicals by 6%; and has outpaced technology by a bigger margin of 8%. Healthcare has also outperformed the S&P 500 by an even bigger 10%. Yet healthcare still remains much cheaper that the two other 2018 sector leaders.
Chart 1
HEALHCARE IS MUCH CHEAPER ON A RELATIVE BASIS ... Chart 2 plots the same three relative strength ratios shown in Chart 1, but over a period of nearly four years. Since the start of 2015, technology (red line) outdid the S&P 500 by 51%. Consumer cyclicals (blue line) outpaced the S&P 500 by 30%. By comparison, healthcare (green line) has done better than the S&P 500 by a much smaller margin of 5%. Of those three, healthcare is clearly the cheapest of the three. And possibly the safest. That may explain why investors growing concerned about a bull market in its tenth year (the longest in history), with one of the highest valuations in history, who are looking for a cheaper and safer part of the stock market are rotating into the more defensive healthcare sector.
Chart 2
HEALTHCARE RELATIVE STRENGTH RATIO IS STILL BOTTOMING... Chart 3 gives a closer look at the Healthcare (XLV) /S&P 500 relative strength ratio. After peaking in the middle of 2015, the relative strength line continued to drop until the end of the following year (2016). After bottoming at the start of 2017, it rallied through the first half of that year before peaking that summer and dropping into the spring of this year. The ratio turned up this May and has been rising since. Chart readers should see a potential "double bottom" forming in the healthcare ratio between the end of 2016 and the middle of this year. The relative strength ratio is just now approaching its mid-2017 peak. Needless to say, a rise above that previous peak would be an even stronger sign. The main point of Chart 3 is simply to show that the relative performance of the healthcare sector has lagged way behind the rest of market since 2015 and is just starting to recover. That shows that healthcare still represents a much cheaper bargain than this year's two leaders (consumer cyclicals and technology); and is starting to do better than both. That may also explain why healthcare has been the strongest part of the stock market since May. A recent Wall Street Journal article also suggested that money managers are moving into the more defensive healthcare sector as a late cycle hedge against an aging bull market.
