Seeking Alpha
Profile| Send Message|
( followers)  

Healthcare stocks have been in the news recently because of the political efforts to reform the health care system in the US. Late last year, just before the Christmas holidays, the senate passed the “Affordable Health Care for America Act” by a margin of 60-39. Right now it is continuing to wind its way through the halls of power in Washington with most expecting it will be signed by Obama shortly.

There was a lot of chatter online and in the mainstream media about the price action in health care stocks. Many pundits pointed out that the bill must be bad for consumers and good for the HMO’s because their stocks were hitting new highs. While no one is really happy about the resulting bill, let’s leave aside for now the political arguments and concentrate on the trading opportunities that this presents.

The political developments did have an effect on the sector as it spiked 13% from November 2009 into the end of the year, even though the sector was, on the whole, very overbought already. Here is a chart of the bullish percent index for the S&P Healthcare sub-index:
bullish percent healthcare Jan 2010

If you are new to bullish percent charts, they are created by taking the number of stocks within a group that are exhibiting a specific point and figure pattern and then dividing that by the total number of stocks in the group. For more information on this see: How to Time the Market with Bullish Percent Charts.

As you can see, usually, when the sector’s bullish percent is 80% or higher, we see a significant top forming either immediately or within a short time:

healthcare sector XLV comparison to bullish percent Jan 2010

One might discount this indicator since it doesn’t seem to have a great track record (especially during the most recent run up). But even if we totally ignore it, we have a few others telling us that the health care sector is top heavy here.

Corporate Insiders
Considered by most to be the “smart” participants in the stock market because of their insight into the day to day activities of their companies, insiders are now selling at one the fastest rate they’ve ever been measured at. According to InsiderScore, the last time health care corporate insiders sold their own stock more was in early 2004.

Rydex Market Timers
Taking the other end of the spectrum, Rydex traders hop on hot sectors too late and become dejected and leave assets just as they are forming important lows. Since the sector has been rocketing higher, the Rydex Healthcare fund has attracted a lot of attention from these trigger happy Rydex market timers. In fact, we are now seeing a spike in assets as a deluge of “dumb” money pours into this sector hoping to ride it even higher. According to the latest figures, RYHIX holds $184,860,520 of assets. Unfortunately for these traders, historical patterns show this to be a great contrarian indicator.

There’s a maxim on Wall Street, “Buy the rumor, sell the news”. It would seem that once again, heeding this well-worn saying is the smart thing to do when it comes to healthcare stocks.

Source: Beware of Healthcare Stocks