Healthcare Sector Gains During Slow Times

Lately all I ever hear is, “what should I do to make money in this market? Should I be short or long? Should I be in cash or trying to hedge against a downturn?”

The latest round of economic of data, reporting rising 5% unemployment did little to ease concerns. Were should you put your money?

Obviously the “Dogs of 2007” were the financial and housing sectors. However, short positions after such a steep sell-off appear risky. On the other hand a little premature to be long.

Shorting retail through an Exchange Traded Fund [ETF] may produce some short-term gains, but the sector is already undervalued. Mix in the volatility, and many money managers are keeping significant cash on the side.

Typically during slowdowns or times of recession, the healthcare sector out performs the market. IBD’s diversified drug group has outperformed the market during slow downs in 91 and in 2001, already up 1.87% since January first.

The logic; although spending may decline, healthcare cost remain essential even in tough times. Consumers will need prescriptions; doctors require equipment, supplies, and so on.

Below is a series of charts, not so much for technical analysis, instead to give you a picture of increased activity and momentum in the healthcare sector (click all charts to enlarge).

Below is a 1 year chart comparing the S&P 500 (SPY) to the New York Stock exchange Healthcare Index [NYP.ID]. One can see the healthcare sector has lagged behind the market for most of the year.

As the economy’s picture went downhill towards the end of November, the index began an upward trend finally surpassing the S&P in January.

Whether we actually enter a recession is another story, but smart money is already finding its way into healthcare sector bracing for the effects of a slowdown.

Rydex S&P Equal Weight Health Care ETF (RYH) is equally weighted, including a diverse group of 51 healthcare stocks covering pharmaceuticals, healthcare services, supplies, providers, and biotech industries.

Below the chart depicts the relative strength of RYH vs. the S&P 500 index equally weighted [SPX.EW] rising over the past month, and then sharply increasing since the end of December.

RYH Monthly Chart, look at the volume from 8^th till the 11^th.

Below the chart draws the exponential moving averages for State Street Health Care Select Sector SPDR Fund (XLV); the 10, 50, and 200 day averages marked in blue, red, and green respectively. You will notice the ten day is breaking away from the 50 as the 200 continues to move further away from both the 10 and the 50 day, a positive sign of momentum.

I would look for gains between 10 and 20%, depending on how upcoming economic date is perceived. This is not a cash cow, but a way to make money while times are uncertain.

Instead of sitting on cash, put it to work for some gains in the healthcare sector while limiting your exposure through ETFs.