April 23, 2019

Waves transfer energy, not matter, meaning water can bob up and down without moving side to side, because it’s riding on a wave of energy. Waves have crests and troughs: A wave’s height is the distance from its trough to its peak. When we think about a surfer escaping a crashing wave, we might be missing what’s going on underneath the wave. Waves don’t collapse until they reach depths of 1.3 times their height. It’s when waves get to shallow water that they tumble forward and trip. But don’t let that fool you, they can still be very powerful. A typical tsunami’s length is 100 times its depth. A 13,200-foot-deep wave can travel 440 miles per hour across the ocean – almost as fast as a commercial jet.

Markets are cyclical – like waves in a pool. A lot of little waves can mostly move together, but when all waves move together they can slap up over the top of the pool, sometimes enough to knock over a wine glass (this is an adult pool we’re talking about). That’s like what happens when the whole market falls – all sectors can more-or-less fall in tandem downward, and the collective energy is amplified.

Sectors can also crest and trough individually. Let’s look at what’s sloshing around the pool of the S&P 500 lately: Value won last week’s shortened trading week in a small-scale rotation. Investors moved capital out of growth and small caps and into “safer” perceived stocks, such as those in the Dow Jones Industrials, the best performer of the “big 4” indexes. The Russell 2000 was down -1.2% and the S&P 500 finished slightly lower. The NASDAQ was slightly higher, largely due to semiconductors.

When we look at the individual sectors, it’s clear that growth continues strong. Information Technology, Industrials, and Consumers were all up nicely. Again, the PHLX Semiconductor index was having a great week. It posted a +4% performance for a total gain of +45.7% since Christmas. That’s a gain of +0.39% per day including weekends! That’s not a single stock, but an index of 30 of them! Let’s put that into perspective: If you bought a $500,000 house on Christmas Eve, it would be worth $728,500 today.

Mid-range market pains were localized to Real Estate and Utilities. These are rate-sensitive securities and are often chucked aside when growth is in the air. Real Estate shed -3.2% and Utilities lost -1.6%.

And then there was Health Care.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Health Care’s “Pause for the Cause” (and Gauze)

One wave crashed big. Last week saw a bludgeoning of the S&P 500 Health Care Sector Index, down 4.39%. It’s the weakest index since Christmas and a whipping boy right now. Do you recall when candidate Hillary Clinton said she had her eye on health care in September 2015? The sector got pounded, only to come back swinging. I believe this year looks like a similar political attack. Health Care is once again a whipping post for the upcoming campaign. Democrats want “Medicare for All” and Trump is openly against the “thievery of big pharma.” The news cycle paints a lose-lose situation for health.

As a result, Health Care saw unusual selling in 50% of the stocks we track this week. It’s a clear outlier.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Political stories are big in the news, but we live in a data-driven world. Selling ripped through Health, but I noticed that while the sector is scoring very weakly, technically, Telecom is still a much weaker sector in terms of fundamentals. We looked at prior times of intense Health Care sector selling, and what that meant for forward returns. Based on these findings, there is cause for pause – and a little gauze.

Wednesday’s data alone showed that over 28% of our Health Care universe returned a UI sell signal.

To put this rare event into perspective:

  • YTD through April 17, the daily average of Health Care stocks showing UI sell signals was 1.52%.
  • Going back to 2013, there have been only 14 trading days where +25% of our Health Care universe has showed UI selling.

Below are all 14 days since 2013 in which +25% of our Health Care universe saw unusual selling.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

At first glance, there tend to be more days of extreme selling after the first day of big selling. This indicates the chance of some more daily bumps ahead. Extreme selling days are rare, but the average forward return for Health Care is not strong. But two things I know: (1) The nation (and the world) is aging, and (2) People won’t stop getting sick. When this rotation is over, there will be great bargains.

Before you worry about the state of Health Care tomorrow, remember the words of Dale Carnegie:

About The Author

Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. *All content of “Sector Spotlight” represents the opinion of Jason Bodner*

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