A Quick Look Into Healthcare

2018's most outperforming sector continues to lag into Q2 2019

The purpose of this post is to point out a few charts I take into consideration when performing my analysis on the overall strength of the healthcare sector. To start, let’s look at below weekly ratio chart of the SPDR Healthcare ETF $XLV vs. S&P 500 ETF $SPY.

In February, I pointed out the significance of this ratio chart sitting right atop support. My theory included that if $XLV continued to under-perform the S&P 500 and this “support zone" broke, it would be a huge red flag for the continued validity of the sector’s uptrend. Who wants to be overweight a sector that is under-performing relative to the broader market? Some could argue a case for it - but for me, when it comes to trend following, I want to pick the winners.

Since the ratio chart’s break-down in February, the sector (like much of the market) has been trading within a range. Below is the daily chart of $XLV. Notice, in recent months, price formed a coil chart pattern on declining volume. On Friday, we saw a breakdown of the trend line coupled with a high daily volume bar; indicating more selling pressure is likely to follow. None of this is bullish in any capacity.

Now, $XLV is a market cap weighted fund. What about the performance of this sector from an equal-weight fund? $RYH is the EW Healthcare ETF and it is steadily outperforming the CW ETF of $XLV. The below is a ratio chart of $RYH vs. $XLV. We saw a bullish momentum divergence off its December lows, which indicated a shift in leaders - and since these lows, the chart has been on quite the tear.

Year to date, the equal weight fund of $RYH is up +10.55% while the cap-weighted fund of $XLV is up only +4.20%. But what does this mean? I believe Tom Bruni, a technical analyst from All Star Charts said it best here. He touches on the misconception that in order for there to be market breadth, the Equal Weight must outperform the Market Cap weighted funds. Tom does not believe this to be the case and I couldn’t agree with him more. When EW is outperforming CW, this does indicate that there is an expansion of upside participation within said sector/index, but to consider this your sole gauge of breadth and call it a day is irresponsible. As Tom explains, the data says otherwise when it comes to this measure.

So let’s look at the facts here.

  • Healthcare is under-performing the broad market (both EW and CW)

  • Equal-weight Healthcare is Outperforming Cap-Weighted

With what we know, I believe the best way to play this sector is to find individual names within it. We know that EW is outperforming, but why? What names are aiding in the out-performance? If we’re looking for exposure to this sector (for whatever reason) let’s find those names and see what more we can piece together. Which sub-sectors of healthcare do the strongest names belong to? Is the run in Medical Devices over or are we just taking a pause? These are questions I continue to ask myself as I dive deeper into individual sector analysis.