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WALL STREET WAS GLUED TO the weekend vote on health-care reform and scrambled to figure out which areas, if any, might benefit from its passage. Technically, however, the fortunes of the sector relative to the broad market changed for the better a month ago.
In other words, nothing historic changed in these stocks, to borrow from the description of the bill itself. The sector is still in a bull market.
The Select Sector SPDR Health Care (XLV) ETF, while not at new highs for the rally from the 2009 low, is one of the few sector proxies that did not break its rising trend (see Chart 1). Most others moved below their rising trendlines during the January correction so health care is in good shape technically.
Chart 1
I have to step back for a moment here to acknowledge that the health-care sector has underperformed the broad market over the past year. However, when analyzed on its own merits, its chart shows a clean rising trend with technical indicators to support its rally.
The health-care ETF may have made less money for investors than the Standard & Poor's 500 did but it is actually in a stronger position now with a more sustainable rate of advance.
According to Philip Roth, Chief Technical Market Analyst at Miller Tabak, most elements in the group have been doing fairly well in recent months after having lagged in the second and third quarters of 2009. "Sort of a the worst is not going to happen," he said, regarding the health-care legislation.
When asked if he saw anything different technically, now that the vote is over, he answered, "The the sector now looks pretty much like the broader market measures, namely up, but in the mature stages of an advance. I have been recommending some health-care stocks all along; no more, no less right now."
Rick Bensignor, Chief Market Strategist at Execution Noble LLC, had a slightly more bullish take. Some of the more esoteric technical studies he follows, which cannot be fully explained in this column, give him a buy signal on the sector as a whole. Adding, "As much as I don't like the idea of having news be the catalyst for a change in direction, it appears as if this sector may now outperform."
Of course, some industry groups within the sector do seem to be performing better at this very early stage after the vote and the hospital group is leading the way. Indeed, a chart of the Morgan Stanley Health Care Provide index shows that relative performance vs. the S&P 500 changed for the better as early as December.
One component stocks, Health Management Associates (HMA), has more than an 8% gain with a technical breakout from its six-month trading range (see Chart 2). Volume, momentum and relative performance measures all support the bullish case.
Chart 2
However, as Bensignor cautioned, technical breakouts sparked by news events do make chart watchers a bit uneasy. For that reason, investors should not blindly rush into such stocks without getting the market's blessing in the form of similar strength.
One group that had a nice run-up last week prior to the vote was the health maintenance organization group, better known as the HMOs. There was much discussion on the fundamental side on how this group would fare under the reform bill as written but technically it remains in good shape.
Currently, many of its component stocks, such as Health Net (HNT), are bumping up against respective January highs (see Chart 3). However, these stocks seem to have stalled, not reversed course and volume and momentum indicators remain positive.
Chart 3
All around the sector, I cannot say that anything looks immediately in danger of topping, but it is still early in the post-vote world. For now, health care as a sector seems to be building on recent improvements.
Getting Technical Mailbag: Send your questions on technical analysis to us at online.editors@barrons.com. We'll cover as many as we can, but please remember that we cannot give investment advice.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
Comments? E-mail us at online.editors@barrons.com
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