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Sector Rotation: “Are we in a Sector Rotation into Healthcare?”

Apr. 15, 2011 12:50 PM ET6 Comments
Norman Tweed profile picture
Norman Tweed's Blog
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Dividend Growth Investing, Oil & Gas, Utilities

Seeking Alpha Analyst Since 2010

Retiree interested in stocks and financial instruments, especially dividend producing stocks. In the 20th century, I was an electrical engineer with Dominion Energy. I use a dividend growth investment style. Quick rules of thumb for complex questions, like fair value p/e using the Gordon model, price = growth and total liabilities/total assets ratio for leverage calculations provide a starting point for my investment decisions. As a retiree, preservation of capital is paramount.


Many market pundits believe the market is over valued and ready for a pullback. “Sell in May and Go away” is on their tongues. Seasonally, I believe they are correct. However, this is an opportunity rather than a catastrophe. Sector rotation is basic to the business cycle. This Stock Charts link can be used to follow rotations from January 4, 1999 to the present. Note: When you get to the chart and it says error, drop down to select a PerfChart and select S&P Sector ETFs. the best effects can be obtained by clicking the bar chart button at lower left. If you want to animate the chart, right click on the chart and select “animate”.


As you slide through the cycle, notice how the bars move in a cyclical motion, like an engine. To every sector there is a time of growth and out performance, and then a time of under performance.

Chart forSPDR S&amp;P 500 (<a href='https://seekingalpha.com/symbol/SPY' title='SPDR S&P 500 Trust ETF'>SPY</a>)



Notice how healthcare sector followed the market into the Great Recession of 2008, but didn't fall as far. Also notice how it got back to neutral in late 2009. At the present point in the cycle, healthcare appears to be on the rise. Why is that? In my opinion, it has to do with healthcare stocks being overly beaten down with the rest of the market, at a time they were making money. P/E ratios for healthcare stocks are hovering around 10, while yields are nearing 5% globally. There is a distinct movement towards high yield stocks, with 10 year treasuries yielding 3.43%. ^HCX is up 7.71% for this year and up 1.1% today, while SPY is up only 5.13% for the year.


As you play the link above, get a feeling for the rhythm of the cycle. You too may become a healthcare junkie!


Disclosure:  I am long Healthcare stocks.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.

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