Healthcare has been the worst sector this year, but it recently flipped the script as the best sector performing in August. Given its improvement, what has been driving the sector’s movement and will it last?
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Relative strength is useful in identifying which areas of the market hold long-term strength, but equally important is its ability to identify areas to avoid or underweight. While most areas of the market are firmly in the green this year, the same cannot be said for healthcare. The Health Care Select Sector SPDR Fund (XLV) is down 0.05% this year while no other major sector SPDR fund is negative on the year. Movement lower resulted in the group moving to last place within DALI in July, sitting 25 signals behind the next closest sector entering August. Recently, things within the sector have shown initial signs of change. Healthcare is the best performing sector so far in August, with XLV gaining 5.4% to flip its trend back to positive. Within Asset Class Group Scores, the group has risen 0.5 points this month and has more than doubled its score since its low of 1.07 in May. Recent movement begs the question, what has been driving the sector’s movement and will it last?
One of the biggest drivers of healthcare underperformance this year has been the deterioration of healthcare providers, most notably from UnitedHealth (UNH), Elevance Health Inc. (ELV), and Molina Healthcare (MOH) all hitting multi-year lows. Many of these companies lowered guidance and fell in July due to reduced funding for the Affordable Care Act (ACA), Medicare, and Medicaid. The iShares U.S. Healthcare Providers ETF (IHF), which includes the three previously listed stocks, was not immune to its share of technical deterioration. IHF slid -14% and fell to a fund score low of 0.06 in July. However, the fund was previously oversold by more than 110% entering August, partially explaining why the group and broader sector rebounded in recent weeks. Although, IHF still holds an extremely weak fund score of 0.25 while XLV also remains unacceptable with a score of 1.52 given their long-term weakness.
Overall, healthcare continues to look weak across the long-term, but it could be an area to monitor should the recent improvement continue. That said, acceptable areas within healthcare do exist for those seeking exposure. Pharmaceutical companies have outperformed the broader sector, as the iShares U.S. Pharmaceuticals ETF (IHE) is up 6.8% YTD, but its score of 2.72 is still below the acceptable 3.0 threshold. The group has been dragged down by the largest names due to struggles from many weight loss drugs, with 1 for 5'ers Eli Lily (LLY) and Novo Nordisk (NVO) down 8% and 37%, respectively. One drug stock to look toward is Cencora Inc. (COR), which has been a 5 for 5’er since 2023 and reversed to a buy signal earlier this month. Long exposure can be considered here while strong support is between $280 and $268.
Meanwhile, Biotechnology is another solid subgroup of healthcare, with the iShares Biotechnology ETF (IBB) up 4.7% YTD after the almost 29% rally off its April low point. IBB has an acceptable fund score of 3.58, which is 1.26 points higher than the average healthcare fund. One biomedical stock to look towards is Gilead Sciences, Inc. (GILD), which is a 4 for 5’er that completed a double top earlier this month at $118, marking its fourth consecutive buy signal as it nears new all-time highs. The stock offers an solid yield of 2.6% while support can be seen from $110 and $106, in addition to the bullish support line at $102.
