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Today's Market WrapUp 04.01.2008 Mon Tue Wed Thu Fri Barbera Archive Technical Update:
Healthcare Sector This week we step away from the depressing specter of the Real Estate debt deflation and our ongoing economic miasma, to present a piece for those of you who are ‘die in the wool’ stock and sector pickers. In our own research, we constantly track various market industry groups and we rank them regularly to get an idea what is currently IN and OUT of favor. While we all know that Finance in all is various iterations, including Investment Banks, Broker-Dealers, Banks, Mortgage Companies etc., has been at the bottom of the list for months, while Precious Metals have resided near the high end of the list. However, over the last few weeks, we have watched in amazement at the striking collapse in the Healthcare sector, which has historically been a defensive corner of the market and which has recently undergone one of its greatest shake outs in several years. Dotting the bottom of the sector performance ranking at this time are names like, Health Maintenance Organizations (HMO’s), Healthcare Insurance Companies, Drug Distributors, Nursing Homes, Medical Products and Drugs. To that end, we should start this piece with a reminder that back in 2000-2002, during the great NASDAQ Bear Market, Healthcare stocks trended higher for much of the period during which the NASDAQ Composite moved lower.
We see this positive action within the Healthcare Sector illustrated by the performance of Fidelity Select Healthcare which, from the beginning of the NASDAQ Bear (see left arrow) began to rise and held up with a NET gain throughout the Bear Market until the very last days of the bear market (right arrow) where it finally capitulated. Thus, since we are once again in the grip of a bear, we thought it might be worth a little time to inspect the sector and discern whether or not there could be a good opportunity approaching for a day when the major indices are not performing as spectacularly well as they did today. In bear markets, rallies are often headline grabbing, but it is the primary trend which must be of the utmost importance, and for the US and Global Stock markets, even with today’s powerful rally, the primary trend remains strongly down. For Healthcare, we track the sector using our index which consists of 20 large cap stocks and which does not include any large cap pharma, which in our work, is a different sector. To present a flavor of our index, the group contains names like McKesson (MCK), Aetna (AET), United Healthcare (UNH), Cardinal Health (CAH), Humana (HUM), Amerisource Bergen Corp (ABC), Cigna (CI), Lincare (LNCR), Coventry (CVH), Varian Medical (VAR), St. Jude Medical (STJ), Medtronic (MDT), Stryker (SYK), Davita (DVA), Express Scripts (ESRX), Medco Containment (MHS), Covidien (COV) etc. In the chart below, on the top clip, we show the decline in the GST Healthcare Index which is now down 30% from its highs last February. In addition, on the lower clip, we plot the Relative Strength Ratio versus the S&P 500. Around both the index itself and around the Ratio, we plot a 3 Standard Deviation Band for 12 months.
With three standard deviations, we are talking real statistical extremes and we point out that going back over the last decade, every single time the R/S Ratio for Healthcare has made full contact with the Three Sigma lower band, Healthcare stocks as a group have been higher three months and six months out. Thus, as medium term potential buy signals are concerned, just the very fact that this sector has moved down to such a statistical extreme suggests that risk levels may be more favorable moving forward.
In addition to the very extreme price action carrying the sector down to its three Sigma lower band, it goes without saying that technically, the Healthcare sector is massively oversold. In the chart above, we show our GST Summation Index for Healthcare stocks which is currently near the deepest, most oversold values seen in the past decade. Here again, a decade low in oversold extremes, seems at least worth a potential note. While the Summation Index tracks group breadth, a measure of Advancing and Declining issues, we can also look at Volume for clues as to how compressed a given sector may be. In our work, we like to track a one year ratio of Up to Down Volume for each sector to highlight the really overbought and oversold extremes. In the case of Healthcare, readings of 1.00 on this Up to Down Volume gauge are neutral with readings above 1.10 overbought and values below .90 deeply oversold. Here again where volume is concerned we see the same story playing out, namely, a sector that is deeply compressed and potentially at some type of more important extreme.
Another theme and variation on Volume is to use a cumulative volume approach rather then a ratio, as this often can convey important trend following information. In the next chart, we see cumulative up less down volume, ratio adjusted for the changes in aggregate volume in the overall market over the last 10 years. In this chart, we see that cumulative volume for Healthcare has really been in a very long decline dating back to a peak in late 2000. Over the last few months, we have seen a veritable collapse in cumulative volume falling down and outside the lower channel line, often an indication of an excess selling extreme.
To characterize this extreme in a more quantifiable manner, we next construct a very long term Overbought – Oversold gauge based on the Cumulative Volume line. For this gauge, readings of +50 to +75 have been overbought, while readings below –50 to –75 have been oversold. Importantly, as recently as March 19th, this gauge moved down to a reading of –152.15, which is as oversold an extreme as has ever been seen. In fact, going back to the highest value ever seen, we note that the peak value for this gauge was seen on 1/02/01 with a value of +155.17. Thus, recent values have been at the equal and opposite side of the fence. In our view on a forward looking basis, this almost unprecedented technical extreme suggests that we should be on guard for more signs of basing action (which would be needed) in the Healthcare sector; if things begin to improve, this sell off could end up leaving a major, long term low. To achieve confirmation that a low is in place, normally we would like to see the 50 day moving average for a sector turn up, or at least flatten out, and for now that has not yet taken place. Thus, notwithstanding the deeply oversold values, it is still premature to conclude that a low has been seen. However, what we can conclude at the moment is that the prospect for a low could be at hand and that going forward, we should be paying closer attention to the news flow and price action within the Healthcare sector. If the news and price action start to improve, that could be a strong signal that this severely washed out sector is ready for a turn. To that end, having followed this sector for many years, we decided to spend some extra time looking below the surface at names which normally do not make the analytical radar. Using our TC 2000 screening software, we screened the sector for small cap growth names, where good or at least reasonable valuations are present combined with a certain element of profitability, and positive relative strength. Our technical screens surfaced approximately 18 small cap names, none of which we are recommending, but all of which may be useful entities for those who like to do homework, to investigate further. In the chart below, we show the large cap healthcare stocks in the top clip, and a basket of these 18 smaller cap – microcap healthcare names in the middle clip. At the bottom, we plot the relative strength ratio of Micro Cap Healthcare versus Large Cap, with the smaller fry holding up very well during this latest decline. To aid any readers who enjoy doing their own company research, we provide the entire output of our computer screens in the set of four tables which follow below. In the first table, we rank the Small Cap names from top to bottom by relative price strength, while in the second table, we rank them by market cap in decreasing size. While we know many institutions will never touch small cap stocks, over the next 10 years, nearly 80 million Americans will be retiring and with that, the demand on the healthcare system for better care and better products is likely to remain very high. In the final two tables, we rank our micro-cap group by valuations and the five-year growth rates, where in both cases we see what could be some potentially very eye-catching results. No buy signals yet, but plenty of interesting sub-sectors to investigate and chew on. Table 1
Table 2
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