Is Investing in Healthcare (XLV) the intuitive choice or am I behind the Curve?

WHY Healthcare (XLV) Is Very Bullish — Diagnosing The Power Rank Upgrade

With the exception of XLE, the Select SPDR Sector ETFs have been rated neutral for weeks now. Last week, things finally changed. 

Looking at where we are in the market now, it’s interesting that the SPDR sectors made a move. Analysis by my colleague and Chief Market Strategist and CMT, Dan Russo, shows the market approaching a key resistance level, where a lack of volume on the way down in this trading range implies movement back up in this price area might be like pressing the gas on your car, only to realize that you have the turbo speed feature enabled. ZOOM! 

Then again, maybe we zoom through the current level we are in, hit the resistance level, and the market pops back down. They’re called resistance levels for a reason…

Here’s what Dan wrote on March 29th:

The rally from Monday’s low took the SPDR S&P 500 ETF (SPY) into the 38.2% retracement level that we highlighted in Morning Insights on Friday. We highlight the same chart here today but in a slightly different format. In the chart below, we can see the key upside retracement levels at $264, $279 and $293. We have also added Volume at Price to illustrate the importance of the $290 – $300 range. In our view, this is the level where bulls could be trapped, the level where the “buy the dip” crowd may have stepped in to employ the strategy that had served them so well of the course of an 11-year uptrend in equities only to see the market continue to plunge. What should also be clear is that there is essentially an “air pocket” in the Volume at Price Indicator, meaning that there is not a lot of volume that traded between $264 and $293. Said differently, there is not a large vested interest in defending that zone. 

Chart from Chaikin Market Insights – 3/29/2020

We remain of the view that the speed and magnitude of the drawdown in the equity market increases the odds that an initial low will be tested and possibly undercut. However, we recognize that “bear market rallies” can be fast and just as violent to the upside. The question is, from what level will a test of the lows begin? Over the next few days, the market is likely to make it’s message clear. On the move to the downside, SPY cut through what should have been key support levels like they weren’t even there. After making an initial low on Monday, SPY appears to have failed at it’s first important test of resistance at the 38.2% retracement. Should this remain the case, the market is likely to remain under near-term pressure. However, a move through $264 would take SPY into that volume “air pocket,” putting $293 in play. 

Chaikin Market Insights – Dan Russo, CMT 3/29/2020

Since I don’t have a conviction that the market is going to go one way or the other, I’ve taken more of a wait and see approach since buying in two weeks ago, that is until I saw the upward movement of the Healthcare ETF (XLV) and the downward movement of the Industrials ETF (XLI) in our model. Not only did this fascinate me because it was a switch from the Corona “Norm,” but it also piqued my interest because it provided some new information to a conversation with an old friend.

This friend was asking about investing in the market. She just received her, what my boyfriend refers to as, “Trump Bucks” and wanted to know where she should invest them. I was discussing our recent upgrade of XLV from Neutral to Very Bullish. Her biggest concern with XLV is that she believes the stocks that have benefited from spikes due to coronavirus won’t sustain their strength after the virus is gone but will instead fall back.

My belief is that it all depends. It depends on whether coronavirus fundamentally transforms the healthcare industry. Will the changes in how business is structured and conducted last (whether because it is too expensive to switch back, or whether the changes were actually for the better)?

While intuition would say that healthcare is the place to invest since it is basically the only sector benefitting right now, I was curious as to WHY our model decided to change to Very Bullish now? What has our model seen that supports the intuition on a more technamental level?

Just a warning, since we will be taking a deeper dive into the model, the following article will probably be on the drier side. I have provided a TLDR (too long didn’t read), which summarizes my conclusions.It’s actually not that long (~500 words), and the explanation makes the TLDR valuable. But, if you accept my conclusions and would like some ideas for what to do next, see yesterday’s blog post, written by my more entertaining colleague, Marc Gerstein.


A. Our model looks at both:

a. future potential based on a combo of underlying stock fundamentals, technicals, growth, and sentiment (referred to as Foundations);

b. And our model seeks 2 technical reaffirmations of the Foundations.

B. In the case of XLV, our model has persistently liked the foundations, but a gap previously existed between the Foundations (a) and the one of the technicals (b), which has just corrected itself.

C. Specifically, our model has seen a significant improvement from the lows in short term technical indicators which have been confirmed by midterm indicators, leading to a shift from Neutral to Very Bullish on XLV.

ETF Rating System-

While I plan on reviewing the ETF rating and how it applies to XLV, for a more in-depth explanation of the ETF Rating System, please email me at [email protected] for our white paper.

Basic Breakdown of our Model:

1. Bull:Bear ratio (Equally weighted) rollup of stock PGRs

2. WAVG- a MarketCap weighted rollup of stock PGRs

3. Technical Rating (Asset Class Relative)

The result of this is an Overall Score rated from 0-100. Then we confirm this rating with:

4. Continuity Check

5. Technical Overlay

Now we can work with our Final Rating.

Analyzing the chart above, on 4/3, we see that the Bulls:Bears score and the WAVG score (the equity related components mentioned in Steps 1 and 2 of the Breakdown) are both rated Four (out of Five), which results in a Bullish rating. Checking on 4/9 and 4/17 reveals the exact same results. In translation, the part of the model that analyzes the equities held in each ETF is bullish on the equities, and has been bullish for a while now.

The same thing applies to the Technical Component of the Overall Rating (Yellow Star). On 4/3 the Technical Component was Bullish, which implies that the Overall Rating should probably be Bullish as well, which it is. The next line in the chart reveals that the ETF passes the continuity test. So far so good. However, when we finally hit the last step (technical overlay), this is where we see the ETF demoted down a rating to Neutral (Purple Star). This is the gap mentioned in TLDR Point B, where the Foundations and all of the technicals aren’t telling the same story.

To summarize, on 4/3 the Technical Overlay did not confirm the Foundational Bullishness, which is why XLV was rated Neutral instead of Bullish. An important difference between the Technical Component of the Overall Score and the Technical Overlay is that the former is tilted toward the Longer-term, while the latter examines the shorter and medium term technical situation. In the case of XLV, the ETF looked for a longer investment horizon, but it was suffering in the short term, caught, as we know, in the wave of bearish sentiment that infected the market as a whole.

Since 4/3 we have seen a significant improvement in the technical position of XLV. This improvement led to a rise in the Technical Component of the Overall Score, boosting the rating from Bullish to Very Bullish. It also impacted the shorter and mid term indicators such that the Technical Overlay is no longer demoting the rating to Neutral. If you would like to read more about the technicals in our model, don’t forget to reach out regarding the white paper.

Overall, given the fact that all of the components of XLV are bullish and very bullish, our model thinks healthcare is a good place to be. For a deeper analysis and breakdown of the healthcare industry investment options (and a frankly, more enthralling read), check out my colleague’s blog post!

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