Health Care:
Losing Less

As the rangebound price action continues to frustrate investors in the space, under the surface, the group has been outperforming the S&P 500 during this period of heightened market volatility. Unsurprisingly, defensive industries such as Providers & Services and Pharmaceuticals have been outperforming, with some early signs of relative strength within the Biotechnology space – an industry that will be closely watched over the next few weeks as a gauge for risk appetite within the sector. Short-term breadth in the space is making a recovery attempt from washed-out levels over the past several trading sessions, leaving the door open for the sector to potentially attack the major moving averages from below.

S&P 500 Health Care

The Health Care sector has given investors two false breakouts in 2022, failing to hold above the 1,590 level. Recent weakness in the group and the broader equity market has pulled the sector below the 50 and 200-day moving averages. Key support near 1,450 is the level that Health Care bulls must defend before reclaiming the moving averages.

Relative to the S&P 500

While the absolute trend leaves much to be desired, the group remains an outperformer, extending its lead on the S&P 500 since we last looked at the space on April 12th. Much of our sector work of late has been focused on the need for investors who must maintain equity exposure, to focus on what is “less bad.” The Health Care sector has been a good example of this line of thinking.  

Drilling down on the industry groups within the Health Care sector:

Health Care Equipment

The improvements that we highlighted for the absolute trend in Health Care Equipment proved to be short-lived. The group has moved below the 50-day moving average and has broken support at the 2,220 level. Below these key price points, the door is open to a test of the pre-COVID highs near 1,900.

Relative to the broader Health Care sector, Equipment remains an underperformer, trading near the lows of the past two years below the declining 50-day moving average.

Health Care Supplies

The bearish view on the Health Care supplies group continues to play out as the index fell below the levels seen prior to the onset of the COVID pandemic. The group is below the declining 50-day moving average and resistance near 330. it is hard to become excited until these levels are reclaimed.

Relative to the Health Care sector, the trend is bearish, below a declining 50-day moving average and trading near two-year lows.

Health Care Providers & Services

Health Care Providers and Services have left a false breakout in place after failing to hold above 1,575 and the 50-day moving average. The series of higher lows since last October remains in place but retaking resistance is now key for the bulls.

Relative to the sector, the trend is bullish above the rising 50-day moving average, trading near its highs of the past 18 months.

Biotechnology

Biotechnology is another group that has left a false breakout on the chart after failing to hold above 5,100. The index is below the 50-day moving average and in a choppy consolidation that has been in place since January 2021. 

Relative to Health Care, Biotechnology continues to outperform. The ratio is above the 50-day moving average and price-based resistance.

Pharmaceuticals

After losing support at the 960-breakout level, the Pharmaceutical industry is using the rising 50-day moving average to rebound. The benefit of the doubt remains with the bulls if the price is above these key levels.

Relative to the sector, Pharmaceuticals have broken to new highs and maintain a leadership position.

Breadth

After reaching washed-out levels in late April and early into this month, the percentage of Health Care components trading above their 20-day moving averages crossed above the 25% mark off the lows for the first time since early March. There were 183 instances since 2001 where the percentage of Health Care components trading above their 20-day moving averages crossed above the 25% level for a median gain in the sector of 3.70%, with a 68.33%-win rate over the following quarter. It’s worth noting that median gains have tended to peak 46 trading days out at 4.00% on an improved 70.88%-win rate, so consideration should be given to hold times.

When this breadth condition was present, the top-performing Health Care industry ETF was Genomics & Immunology (IDNA), with a 7.42% median three-month gain on a 59.09%-win rate with a sample size of 22 since 2019. While these results have been attractive, note that the win rate was comparatively weak with small sample size. Healthcare & Equipment (XHE) comes in at a close second with a 6.24% median three-month gain on an improved 71.74%-win rate on a sample size of 92 since 2011. However, in the previous section above, note that this theme has been a chronic underperformer, and opportunities in this space should be viewed as countertrend in nature with a magnified risk management process.

This note is a preview of our Sector Deep Dive. See our thoughts and more in the full report.