Healthcare currently ranks eighth in the DALI sector rankings and hasn't climbed higher than sixth in the last three years. However, a trip to the Asset Class Group Scores page tells a different story.
One could be forgiven for thinking there isn't much going on in the healthcare sector. It currently ranks eighth in the DALI sector rankings, putting in underweight territory, and hasn't climbed higher than sixth in the last three years. However, a trip to the Asset Class Group Scores (ACGS) page tells a different story. In the ACGS rankings, healthcare currently sits in the top decile (13th out of all 134 groups in the system), higher than any of the 10 other GICS sectors; meanwhile, the biotechnology subsector ranks fourth of all groups in the system. Biotechnology and healthcare also have the two highest score directions of all groups in the system at 3.94 and 3.25 respectively, showing that both groups have improved significantly over the short-term.
The Asset Class Group Scores and DALI serve the same basic function – identifying areas of strength and weakness in the market. So, why is healthcare in the bottom tier of the DALI rankings while the ACGS show a positive technical picture for the sector? The simple answer is that the ACGS change more quickly than DALI. DALI relies solely on relative strength, utilizing matrices and proxy funds to derive its rankings. If a sector has had a long period of underperformance, it can take a while for it to generate the relative strength buy signals required to climb the rankings. The ACGS also relies on relative strength, but it also incorporates metrics that pick up absolute performance – like move averages and trend – which can often change more quickly. This does not mean that one system is inherently better or worse than the other – only that the ACGS may show signs of a developing trend earlier than DALI.
And so, currently we see signs of strength building in healthcare and biotech, which have not yet begun to show up in DALI. Whether this turns into a long-term trend that see healthcare climb to upper echelon of the DALI rankings remains to be seen, but there is already enough meat on the proverbial bone to for trend followers to consider increasing their healthcare and/or biotech exposure. And if you’re concerned about the market’s lackluster performance over the short term, healthcare has the added benefit of being a traditionally defensive sector.
Those interested in adding broad healthcare exposure can consider the State Street Healthcare Select Sector SPDR ETF (XLV). XLV has a 4.26 fund score which is well within the favorable score range but is 0.32 points lower than the average for all healthcare funds; it also has a positive 3.07 score direction.
While XLV is certainly an acceptable option, the highest scoring funds within the sector are primarily biotech or pharmaceutical focused. The iShares US Pharmaceuticals ETF (IHE) has a near-perfect 5.82 fund score, which is 1.25 points better than the average for all healthcare funds, and a positive 4.41 score direction. In November, the fund gave a buy signal on market RS chart for the first time since 2021. On its default chart, IHE has completed four consecutive buy signals and currently sits just off its all-time high. The fund currently sits in heavily overbought territory with a weekly overbought/oversold (OBOS) reading of 81%, so those interested in adding exposure may be best served to do so on a pullback into the lower $80s.
The Invesco Nasdaq Biotechnology ETF (IBBQ) has a similarly strong 5.78 fund score and positive 5.09 score direction. Like IHE it also moved to a market RS buy signal in November. IBBQ also trades just off the all-time high it reached last month, but unlike IHE, it remains in actionable territory on its 10-week band with a weekly OBOS reading of 52%. On its default chart, IBBQ moved from $19.75 to $29 in a single column of Xs and shows no nearby support on its default chart. However, its more sensitive $0.25-per-box chart shows that IBBQ briefly reversed down and found support at $26 in November before continuing higher.
