This Sector is On the Rise

December 16, 2019  |  Michael Reilly

Consider this, some of the best and brightest analysts on Wall Street provide investors nothing more than a best guess. 

Because that’s all earnings “estimates” – or price “projections” – are… a best guess.

So these analysts pour through volumes of data; balance sheets, Income statements, PEG ratios, P/E estimates, etc.

Then, after crunching all the numbers, they come up with an estimate of future earnings or price. 

In other words, they give their best guess!

That’s what I respect about price, it’s not an estimate – price is price. It never gets restated. It’s not an opinion, it’s not a best guess. It’s definitive. 

Every day, the market dictates the price of securities, based on supply and demand dynamics. 

So, it makes a lot of sense to study the relationship between supply and demand that affects price.

You’ve heard me say it before – we’re interested in what is happening, not what might happen.

We invest based on what is in front of us now and adjust accordingly.

We track the direction of prices.

Are prices moving up? Are they moving down? How are they moving in relation to the alternatives? 

This is the study of relative strength.

We’re all about the relative strength relationships that exist between and within global markets. It’s what we do. 

When something hits our radar, we want to share it with you – giving you an opportunity to adapt your investing accordingly.

Just recently, our relative strength algorithms alerted us to improvements in a sector that has spent most of 2019 in the doldrums.

And although the sector still ranks in the bottom half of the 11 broad U.S. sectors we analyze, it’s seeing a big increase in demand (buying by institutional investors).

That’s caused this sector to break out to new all-time highs. 

When demand is strong enough to push a sector to break out to new all time highs, investors should take note!

And that’s exactly what’s happening with Healthcare right now.

Take a look at this chart of the State Street SPDR Healthcare ETF (XLV).

(Click any image to enlarge)

After more than 18 months of consolidation, XLV finally managed to break out above its previous 2018 highs. 

XLV is a broad based Healthcare sector ETF, which means it owns stocks from the various sub-sectors that make up the healthcare sector.

We’re talking about Medical Devices, Bio-techs, Equipment, Healthcare Providers and Pharmaceuticals.

Investors have a choice. Own healthcare as a group or get more selective and own only the industry groups that are showing the most relative strength in the sector.

I’ll show you what I mean. Let’s take a look at a few of the sub-sectors that make up the healthcare sector.

We’ll start with Medical Devices represented by the U.S. Medical Devices ETF IHI. 

The chart below compares the performance over the last month of the S&P 500 (SPX), our healthcare sector proxy (XLV) and Medical Device stocks represented by IHI.

XLV has more than doubled the gain of the “market” (SPX) over the last month 6.55% vs. 2.69% – while Medical Devices (IHI) is up 5.05%.

On a relative and absolute basis both XLV and IHI are providing investors significant outperformance.

And here is the Alps Medical Breakthroughs ETF (SBIO).

This thing has exploded to the upside since October. 

This kind of move doesn’t happen without a lot of buying from big institutional money.

And take a look at what Healthcare Providers ETF (IHF) are doing.

Relative strength is about always adapting to what is working now

And what is working now is healthcare.

Healthcare still has a long way to go just to break into the top half of the U.S. sector rankings, so unless the buying frenzy suddenly dries up, it’s likely there is still plenty of opportunity for upside.

Here are a few names to take a look at:

  • IHI – iShares Medical Devices ETF
  • XHE- SPDR Healthcare Equipment ETF
  • IHF – iShares Healthcare Providers ETF
  • PJP – Invesco Dynamic Pharmaceuticals ETF
  • XBI – SPDR S&P Biotech ETF
  • PTH – Invesco Healthcare Momentum Portfolio ETF

At Rowe Wealth, we constantly monitor the relative strength scores of stocks like these and rebalance our clients’ portfolios to only contain those with the highest relative strength scores. High scoring stocks offer the greatest chances of outperformance and significantly reduce risk. As long as you properly assess your level of acceptable risk and your personal investment goals, investing based on relative strength can significantly improve your chances of meeting those goals.

If you’re an investor with a portfolio valued at least $500,000, you’re eligible for a 100% free portfolio evaluation through Rowe Wealth. This quick assessment will measure your level of acceptable risk and ensure your portfolio is optimally structured for the best performance.

For more information on this free assessment, and the many ways Rowe Wealth can help you achieve your investment goals, please call us at 866.711.2836 Ext 3.

We look forward to hearing from you.

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