In 2018, the trend of small-cap healthcare outperformance over large-cap counterparts accelerated aggressively, with the Invesco S&P SmallCap Health Care ETF (PSCH) returning 30.50% year to date (YTD) and the large-cap Health Care Select Sector SPDR ETF (XLV) up a meager 1.70%.
Despite XLV's underperformance relative to small caps and the broader market, some signs of improvement have been developing over the past few weeks. As we can see in the ratio of XLV and the SPDR S&P 500 ETF (SPY) below, prices retested their 2017 lows as momentum diverged positively. This suggests at the very least that we don't want to be short on a relative basis.
On an absolute basis, XLV made nearly four-month highs last week and is attempting a breakout after six months of consolidation. A close above $86.60 would suggest that prices are heading to our next upside price target of $101.30. We also want to see momentum get back into overbought territory.
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