Check Out This Major Sector Returning To Health (And Ready To Lead Market Higher)

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Includes: XLV
by: 360 Investment Research
Summary

Health Care sector (XLV) has recently broken out, following 2.5 years of consolidation.

Initial upward price target with bottom level risk management level ratio (reward:risk ratio) sits at 5:1.

Health Care, representing about 14% of the S&P 500, was an important player in leading S&P 500 growth from 2011-2016.

If you bring up the topic of health care for discussion in the United States, it's likely to generate a wide variety of opinions that invariably revolve around one's political or world view. Thankfully, we don't need to let politics into our portfolio. After all, the market doesn't care about our political views. The market is going to do what the market is going to do. It's going to reflect the balance between supply and demand of all market participants. It's based purely on the economic law of supply and demand: more supply than demand, price goes down; more demand than supply, price goes up. This is a simple market reality often lost by the daily noise factories of financial media and academia. We can argue with price all we want, but it is the final arbiter of value. And for the past two years, it's a fact that the U.S. health care sector, from a price standpoint, has gone absolutely nowhere. That is, until last week. Take a look:

Since July 2015, health care has gone nowhere. For 2 years, this important U.S. sector has been correcting through time. During this time frame, health care (represented by ETF XLV here), experienced a 16% drawdown. But when we look at it from a long-term perspective, the sideways price consolidation is most prevalent. And when we look at it compared to the overall market (using the S&P 500 as our proxy), we can see market participants had no business owning health care during the past 2 years:

Health care represents approximately 14% of the S&P 500. When we look left, we see that from 2011 through mid-2015, health care was a major factor in leading the S&P 500 higher. Of the major market sectors during this time frame, health care was one of the best. That changed in 2015 as the health care sell-off affected the broad market overall. Since mid-2015, health care has not been a sector worth owning. With the recent breakout of health care on an absolute basis, this relative underperformance could be changing and would be an important development in leading the overall market higher.

We can make money in health care (using XLV) with proper entry and risk management. Using the daily chart below, we can tactically identify risk, our number one priority as market participants.

The $73.50-74.50 level is an important one. In 2015, and again in 2016, sellers showed up at this level to drive price back down. The recent break above this level is important, as polarity is now in play. Meaning, once an area of former supply is broken, it should now serve as an area of support. Of course, nothing is guaranteed, which is why every market participant needs an exit plan prior to entry. When is this trade wrong? If price moves below 73.50-74.50, it no longer makes sense to own XLV. A sustained amount of time above this level will signify buyers are in control and an initial target of $90 is on the table. That's a 16% gain and represents a reward:risk ratio of 5:1. We like that.

In the end, it's quite simple. It makes sense to own XLV above 73.50-74.50 (depending on your risk tolerance). Below that, it can be someone else's problem. As always, trade at your own risk. It's our responsibility to stay on the right side of the trade regardless of our opinions.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in this blog. Please see our Disclosure page for full disclaimer.

Disclosure: I am/we are long XLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in this blog. Please see our Disclosure page for full disclaimer.