Health care's finally showing some evidence of being "sick" no more. Given the unexpected election results yesterday, this group has taken off like a rocket on the prospects of potential easing regulations. With five-day rolling returns, through Nov. 9, of 5.78% this sector looks technically primed to outperform in the weeks ahead given heavier gains on good volume and momentum improvement.
Moreover, drug-pricing scrutiny likely won't be a priority in Trump's administration. The lack thereof provides a possible oversold bounce to some of these beaten-up pharma and biotech stocks. While the hospitals could face weakness on any attempt to repeal Obamacare, the backdrop for the group as a whole suggests some mean reversion after one of the toughest years since 2008.
After a tough few months where the Health Care SPDR ETF (XLV) was down over 11% from its August highs into the election, last week's performance has served to cut this in half. It went from being the worst-performing sector by a large margin, year-to-date, of more than 400 basis points to leapfrogging real estate.
In the short run, there've been some technical improvements that look worth mentioning and which suggest an upcoming low is likely in this group. It might be wise to start panning the groups that have suffered the greatest. The reasons are as follows:
1) Extreme oversold conditions on daily charts of the Health Care Sector SPDR ETF, with weekly charts reaching near oversold territory that was hit back this past Spring and last Fall. After 10 of the last 13 weeks were negative (since the peak in early August), daily momentum indicators like RSI dipped down to 21, the lowest since August of last year. Yet the attempted consolidation over the last couple days has helped RSI jump back over 30 quickly.
2) Counter-trend buy signals based on Demark were present at the lows on Nov. 3 in the form of TD Sequential and TD Combo 13 Buy signals and the presence of a 9-13-9 pattern. That pattern can often end the downtrend and potential sharp reversals. The confirmation of this on Nov. 5 led to a surge all the way up to trendline resistance near $71, which aligns with a three-month area of resistance. While this might serve as a possible near-term headwind, the weekly surge in momentum is notable and should help drive this group back higher to resistance at $73.50 and then $76.
3) Sentiment became quite negative on health care ahead of the U.S. election, as the prospect of a Hillary win helped to dampen enthusiasm of those looking to buy dips. Given that the Trump win proved to be largely unexpected, there seem to still be possibilities to play this group as an outperformer between now and year-end.
These stocks are names to own because they have outsized gains given the technical setup combined with a mean reversion bounce following the election: Vertex Pharmaceuticals (VRTX) , Repligen (RGEN) , Action Alerts PLUS holding Allergan (AGN) , Edwards Lifesciences (EW) , and Mallinckrodt (MNK) . While each of these has bounced hard over the last couple days as the prospects of a Trump win grew stronger (which ended up materializing), all of these names still show excellent signs that a further bounce is likely into end of the year.
What to buy: The Best of the Worst --
Vertex Pharmaceuticals was down 21.26% in the last three months, but is showing above-average signs of holding prior lows from March along with trying to break out of its downtrend from August highs. Weekly charts show the formation of counter-trend signals of exhaustion (TD Sequential 13 Buys) with a completed 9-13-9 count. While a weekly close above the close from four weeks prior is necessary to confirm this signal, VRTX looks like an excellent risk/reward under $80 for a move back up to the low- to mid-$90s in the months ahead.
Regeneron is also oversold, having lost more than 21% in the last three months, yet finds itself near a prominent former low that could offer near-term support. Shares rallied hard last Friday to eclipse the former down day from Thursday. The risk/reward for shorts in this stock at this point look poor given the extent of the decline. Rallies to near $370 to $385 look likely, and that constitutes a good near-term technical target.
Allergan lost not only 23% over the last three months into last Friday's close, but over 15% of that came in the last 10 trading days. The current steep downtrend has coincided with momentum getting quite oversold for AGN. However, last Friday the stock managed to hold prior May lows from 2016, and that could translate into a reversal of this downtrend. Moreover, given the presence of counter-trend bullish indications, we should see some degree of stabilization to this downtrend. Any move above $199 should result in at least a rally to around $210 to $215, which initially might provide resistance. Unfortunately, the stock will need to show more evidence before a large rally back to summer highs can occur. For now, an outsized bounce looks likely in the weeks and months ahead.
Edwards Lifesciences had a 20.67% loss in the last three months, which has taken shares down to an important long-term area of trendline support that should create a decent buying opportunity for a bounce in the near future. This area has held as support since 2013 and could provide a decent risk/reward opportunity at a time when weekly momentum has reached the lowest levels in nearly three years. A failure to get back up to highs and then have a downturn could be an intermediate-term concern. But for now EW looks attractive to buy here given this strong area of support that has held on every pullback since 2013.
Mallinckrodt's 30%-plus decline in the last few months is now nearing a key area near former lows that should create an attractive risk/reward entry for longs with the stock under $55. Momentum has become quite oversold, but the stock has held between $50 and $55 since 2015. This selloff should hold these former lows given signs of counter-trend buys emerging in the SPDR S&P Biotech ETF (XBI) and XLV. While declines under $53 would necessitate holding off on buying until this reached $50, it's hard to not see MNK as a good technical risk/reward given the severe decline to near-important former levels that have held over the last year. Bounces to the mid-$60s look likely.