Health Care Stocks Still Promising

 | Apr 11, 2013 | 10:24 AM EDT
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There are various reasons for the rise in health care stocks -- aging Baby Boomers, a flurry of insiders buying shares, new developments driving investor optimism. Whatever the reason, plenty of leadership remains in the sector, and there's reason to see further potential.

 Scanning the holdings in our Equity Overlay strategy, I noticed that two of the names rallying to new highs are Abbot Labs (ABB) spinoff AbbVie (ABBV), which I wrote about recently, and Pfizer (PFE).

Medical is the leading S&P 500 sector year-to-date. Some of the big-cap names within the sector have some "growthiness," as opposed to the more typical characteristics of mature, slow movers. Pundits have been attempting for months to call a market top, and advising investors and traders to sell their shares and head for the hills. Unfortunately, it hasn't quite played out the way they expected.

Has the moment passed for these medicals that are trading in new high ground? Maybe it has. There's no perfect time. Sure, there are technical indicators that can help you with shorter-term timing. I used market-timing methodologies for years, and I understand how indicators like moving average support and tight weekly closes can often precede a further run-up.

The problem is that those indicators are not failsafe. When you time the market in a trading fashion, the indicators only work for short periods. You'll eventually have to trade out of the stock, and possibly (most likely) miss the next run-up.

So what does that mean for a so-called "extended" medical big-cap like Celgene (CELG)? It's working on its fourth month in a row of upside trade, which suggests that some exhaustion could be in the not-so-distant future. The maker of therapies for cancers and inflammatory conditions is clearly a large-cap growth name. As such, it pays no dividend, so investors who opt to buy high won't have the consolation of getting paid to sit out a correction.

In this case, waiting for a pullback could be a wise decision. As I noted above, market timing systems are imperfect, and it's entirely possible investors will shy away from a stock like this, and be frustrated as it only rises higher.

On the other hand, a pullback is an opportunity to grab shares at a lower price. While I don't use moving averages to trade anymore, I still like the potential of a stock with support at a key price line. However, in the case of a broader market correction, it's not uncommon to see growth stocks fall below even their 200-day lines before rebounding. In any case, a steep pullback is not necessarily reason to write off a stock for the longer haul.

Other large-cap medicals and biotechs in new high ground are our holdings Pfizer and AbbVie. Other stocks trading at or near new highs include Regeneron (REGN), Gilead (GILD), Valeant (VRX), Amgen (AMGN) and Biogen Idec (BIIB).

These are all big companies with solid fundamentals, so I'm not going to get into a discussion of which may be preferable portfolio additions. Keep in mind: You don't want too much exposure to any one sector, so don't go overboard with medicals (or any other category) just because you see strength there.

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