Health care stocks have bounced off deep corrective lows, with a few sector funds now probing resistance at last year's bull market highs. Instead of jumping aboard this fast-moving train, shareholders should think about taking opportune profits and hitting the sidelines, steering clear of political cross-currents that are likely to reduce industry profits in the first few years of the next decade.
The Wall Street Journal highlighted growing sector risk on Thursday, reporting that President Donald Trump will sign an executive order that requires hospitals and physicians to disclose health care costs prior to procedures and admissions. The action, if taken, will supplement growing bipartisan efforts to rein in skyrocketing health care costs while keeping the sector on the hot seat throughout the 2020 election cycle.
Of course, the health care lobby will tap its vast political and financial resources to fight new regulations, as it has for decades, but growing uncertainty is likely to keep a lid on stock prices from now through the election. More importantly, the issue is broadly popular with a highly partisan electorate, encouraging both parties to abandon years of inertia and take more decisive action.
The SPDR Select Sector Health Care ETF (XLV) completed a round trip into the 2007 high at $37.89 in 2012 and broke out, entering a trend advance that more than doubled the fund's value into the 2015 top at $77.26. It carved a symmetrical triangle with resistance at that level and broke out once again in June 2017, adding to upside into October 2018's all-time high at $96.96. The fund bounced after dropping 16% into year end and is now trading less than three points below resistance.
The failed December breakout attempt highlights strong headwinds in the mid- to upper $90s, which is typical when an uptrend approaches the psychological $100 level. There's little to complain about when it comes to volume support, with accumulation-distribution indicators lifting back into the 2018 peak. Even so, rising news and event risk argues for a timely exit at this lofty price level.
The iShares U.S. Healthcare Providers ETF (IHF) offers more concentrated industry exposure, with more than 50% weighted in health insurance plans. In contrast, pharmaceuticals comprise 42% of XLV's holdings, overweighting an industry segment that follows a different trajectory than pure health care. As a result, it isn't surprising that IHF is grossly underperforming XLV so far in 2019.
The IHF fund posted an all-time high above $200 in October and failed two breakout attempts into December, ahead of a decline that hit an eight-month low at year end. Unlike its rival, it failed to hold support at the 2018 low, breaking down in April to a 16-month low near $150. The subsequent bounce has now stalled at 200-day exponential moving average (EMA) resistance after failing to pierce the midpoint of the nine-month trading range. More ominously, the 2019 sequence of lower highs and lower lows raises the odds that this instrument has entered a secular downtrend.
Dow component UnitedHealth Group Incorporated (UNH), IHF's top holding, explains 2019's laggard performance. This former leadership play has struggled in 2019, with CEO David Wichmann fanning partisan flames and triggering an April technical breakdown when he warned that Medicare-for-All proposals "emanating from Democrats" would destabilize the health care system.
The stock posted an all-time high at $288 in December and sold off to $232. It broke support after the CEO gaffe and fell to a 52-week low, before bouncing into June. Mixed price action has been testing 200-day EMA resistance for the past month, following a February breakdown and failed March bounce. Steady distribution since last November indicates that institutions are closing out long-term positions and moving to the sidelines, raising the odds for lower lows in the coming months.
The Bottom Line
The health care sector could end multi-month bounces in the coming weeks and turn sharply lower into the 2020 election cycle.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.