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The Bloodbath in Healthcare

April 17, 2019

The Healthcare sector is a hot mess right now. It's by far the worst performing S&P 500 sector YTD and is trading below both its 50 and 200-day moving averages. As you can see in the chart below, the Healthcare Sector SPDR ETF, $XLV has dipped into negative territory on the year while most of the other sectors are up double digits. There has been a lot of chatter about Healthcare's weakness among technicians, most of whom expect further underperformance in the near-term.

Chris Verrone of Strategas Research was on CNBC this week to breakdown the Healthcare sector and help viewers understand what's going on under the surface. He begins by noting that the sector has broken its multi-year uptrend and is now making a series of lower highs. In addition, breadth is deteriorating with the percentage of stocks above their 200-day moving average declining over time. Currently, only 50% of stocks within the sector are above their 200-day.

He then takes a look at the charts of some of the individual names within the sector, starting with  UnitedHealth ($UNH). The stock represents the 3rd largest holding in $XLV but has weighed down the sector more than any other component this year. He expects UnitedHealth to continue underperforming and had this to say about the stock:

"We're a seller of rallies because this long, multi-year uptrend that has been in place for four or five years is now broken. When the trend is down, we sell rallies." 

Bespoke put out an interesting research note this morning highlighting the sector's weakness. They point out that only four of the thirty Dow stocks are negative this year and they're all Healthcare names. UnitedHealth ($UNH), Pfizer ($PFE), Merck & CO. ($MRK), and Wallgreens Boots Alliance ($WBA). Despite actually being in the Consumer Staples sector, they classify Walgreens as a Healthcare stock because it appears to be selling off in sympathy along with the Healthcare sector. Below is the table of the Dow Jones components that they included in the note.

Selling has really picked up over the past few days. Below is a tweet from Charlie Bilello emphasizing the acceleration to the downside. As you can see, the trailing weekly return hasn't been this low in all of 2019.

Most of the weakness in the sector has been driven by the Healthcare Providers space. Looking at the same indicator on the Healthcare Providers ETF ($IHF) you'll notice, that the industry group hasn't seen selling pressure like this in eight years. One reason for this is that UnitedHealth is the largest weighted stock in this ETF by a wide margin, representing 21% of the ETF.

As for Healthcare's impact on the overall market, the price action in this sector appears to be isolated and news-driven. In addition, there are other sectors like Technology and Consumer Discretionary that are picking up the slack for Healthcare. Therefore, we don't expect it to be a major problem for the broader market. It will be important to keep an eye on stocks like UnitedHealth as it is heavily weighted in many Healthcare ETFs. We'll continue to monitor this trend and report back with any major developments.