Jim Farrish's  Instablog

There is a new healthcare bill in town and it is already changing stock prices. On Friday AT&T stated it would write off $1 billion in related charges. The cause? The payment subsidy from the government for prescription drug coverage for Medicare retirees. That subsidy is being reduced. This will happen plenty in the near term and how this plays out will get more interesting in time.

So, what is the impact to the healthcare stocks? That is where the reality of this bill will be played out over the next 12-48 months. If we break the sector down into four categories it will make it easier to see the impact. The first potential impact is the healthcare providers (IHF). They are the hospitals, etc. who actually provide the care the end patient. They are most likely to see the direct impact of this bill. The idea remember is to cut cost of healthcare. One way to do that is to cut the profit margins the providers receive. There are many potential pitfalls to this issue and not the least of which is stock prices in the sector. The chart below shows a rolling top forming as investors take profits from the sector. Set your stops according to the risk you are willing to accept near term.

The second is the biotechnology sector (IBB). This sector could actually be a benefactor. The help will come in the form of stronger pattens to protect the developers of new drugs. There will be incentives passed down as well. Watch the upside longer term to benefit. The short term view is more challenging as they are likely to be lumped in the balance of the sector if the current selling accelerates. Set stops accordingly and look for opportunity in the selling.

The third impact will be the pharmaceutical sector (XPH). At first blush the impact to the sector is likely to be negative, but longer term it could work out the advantage of these companies. The accelerating run higher over the last month shows the reversal in thinking relative to the bill itself. I would set stops in the event the mindset shifts and selling steps up. I like the longer term view for this component of the sector overall.

The fourth impact will be to the medical devices sector (IHI). These companies are those who make all the equipment used in the delivery of quality healthcare. The sector has potential to benefit from government mandates and regulations, but then the most profitable equipment may not make it into use as the current levels looking forward. Mixed outlook as you can see on the chart with the consolidation near the highs at $58.50. Set you stops and see how this plays out moving forward. More clarity will come in time for this sector.

Overall the healthcare stocks (XLV) are in limbo. The sector chart below shows the initial moves higher on the passage of the bill, but the realities of the bill on profits is taking its toll on the sector the last week. The trendline (yellow) is coming into play along with support at the $30.30 level. Set your stops accordingly and manage the risk moving forward. The trading range of $30.30 and $33 could develop short term.

It is time to manage the risk associated with this sector as the data and future impact all weighed out. This will cause volatility in the sector to increase along with a lack of clarity on valuations.