It was not that long ago that health care was the leading sector in the market, handily beating the Standard & Poor’s 500 index for several years. Things have changed. The Health Care Select Sector SPDR exchange-traded fund actually peaked relative to the market in 2015 and has been lagging ever since.
With Tuesday’s declines, the ETF now confirms the bearish change of trend in 2016.
Tuesday’s break was led by a 5% decline in Abbott Laboratories, thanks to a dire warning by St. Jude Medical concerning St. Jude’s implanted defibrillators. But the sector’s condition was weak well before this event.
Within the Health Care ETF, some of the biggest stocks by market capitalization, including Johnson & Johnson and Pfizer, show clear peaks and reversals in July. Pfizer, for example, jumped out of a trading range to new 12-year highs on news that it was acquiring a gene therapy company. However, the next day it fell sharply after announcing better-than-expected second-quarter results a bearish signal. The selling continued for weeks, and that trend is still in effect today.
Merck may be following Pfizer’s pattern. On Monday, it jumped out of a trading range to new highs on news of a favorable lung-cancer drug test. On Tuesday, it dropped just as sharply, in sync with the overall market decline. The rising trend from the beginning of the year is still intact, but Pfizer does present a rather worrisome precedent.
On the biotech side, Gilead Sciences continues to move lower after breaking down to fresh 52-week lows last week.
Technically, this is a very simple chart. The trend is down since June 2015, with weak but not oversold momentum indicators. Volume-based indicators confirm this weakness, so Gilead’s historically low trailing 12-month price/earnings ratio may not be the signal of good fundamental value we might normally expect. With such weak technicals, it is quite possible that the ratio will bottom out not as prices rise but as earnings come down.
Fellow biotech Amgen has fared a lot better this year, but it has technical problems of its own. It rallied nicely since June instead of falling with the overall health-care sector. But it broke down sharply one day after regulators approved Amgen’s copy of AbbVie ’s anti-inflammatory treatment, Humira, the second-biggest selling drug in 2015.
Bad action on good news is bearish, and now the stock seems ready to break down below chart support and head even lower.
Finally, from the health-insurance subsector, UnitedHealth Group also peaked in July and shows a simple yet bearish set of technicals. From a broken rising trendline drawn from the January low to a break and test of the 50-day moving average, this stock has seen better days.
The bottom line is that health care is not the same sector it was when it was leading the market higher. It’s now the weakest sector in 2016, and fresh breakdowns suggest it will remain that way.
Date: October 11, 2016