Buy Pharma, & Medical Distributor stocks
Key Takeaways
- SPX and QQQ look to be bottoming near initial support after recent weakness.
- Healthcare looks to be breaking back out vs SPX in relative terms.
- Pharmaceutical stocks, Managed Care and Healthcare Distributors look most attractive.
The near-term market pullback should be close to completion in the short run and can allow for rallies into April expiration. While the larger trend remains volatile and negative and should pave the way for SPX to test and even break February lows near 4100 before 4800 is tested, that likely won’t happen right away, technically speaking. As discussed yesterday, prices have neared initial technical support, while cycles show an upward bias in US Equities between 4/11 into 4/18 before turning lower. Healthcare in particular, looks very attractive as a Sector overweight, and along with the commodity related names, should be overweighted for outperformance in the weeks ahead, along with Defensive areas like Utilities and Staples between now and the end of Q2. Overall, from a short-term tactical standpoint, it looks right to position long for a bounce with confirmation appearing on daily closes over 4507.57 in SPX and QQQ-358.59.
Healthcare breaking out vs SPX
Healthcare remains attractive technically and has just pushed higher to make a relative breakout vs the SPX in Equal-weighted terms for the first time in over two years. This group was one of my four Sector Overweights for 2022, and I join Tom Lee’s enthusiasm for this group as a sector which should outperform.
Looking back over the past week, Healthcare has proven to be one of the stronger sectors and remains an outperformer within the SPDR S&P Select ETF groups on a 3-month, YTD basis, and also 12-month basis with returns through 4/7/22 of +5.86%, 0.96% and +22.10% respectively.
Healthcare is one of just four main SPDR S&P Select ETF’s to turn in positive performance for 2022 thus far, but its recent uptick in performance deserves some real focus. As shown below when eyeing the Invesco Equal-weighted Healthcare ETF, this has just pushed higher quickly to break out of a long-term two-year base vs the SPX for the first time since 2020.
Pharmaceutical stocks look to be the most attractive part of Healthcare, followed by Healthcare Distributors and Managed care names. Medical Devices are slowly but surely starting to turn higher but are less attractive than these aforementioned groups. Finally, Biotech remains a technical laggard, and extreme selectivity is required before attempting to get long this area.
Pharmaceutical Stocks are accelerating higher, and the entire Pharma space looks like an attractive technical overweight
This is a group which I highlighted back during my 2022 Technical outlook call in January which has now begun to turn higher sharply to confirm this sub-sector as being attractive to overweight.
As charts of the PPH -0.01% (VanEck Pharmaceutical ETF) show below, Pharmaceutical stocks as a group have just managed to exceed 2015 peaks last month after nearly seven months of consolidating near former highs. Upside targets lie initially near $90, but I anticipate this breakout should lead back to $100 with not much resistance.
Specifically, Pharmaceutical names look to be the strongest part of the market, so PFE, BMY, MRK, LLY along with NVO, ABBV, and SNY should be overweighted. Overall, this area looks quite bullish and should outperform technically in the weeks and months ahead.
Medical Distributor stocks, like ABC, MCK 1.58% , CAH 0.39% are also extremely positive here in the near-term.
Outside of the Pharma stocks, the Wholesale Drug/Supply area within Healthcare remains also quite bullish technically. Some of the better technical names include ABC, MCK and CAH.
As shown below, this Marketsmith chart shows the breakout above 2015 peaks following a lengthy four-year decline into 2019 and rebound back to new all-time highs. Whenever a group or index makes a well-defined high that gives way to 20%+ weakness before rebounding to exceed these former peaks, it deserves special focus as a group which might outperform on its move back to new all-time highs.
Given the extent of this seven-year base, it’s expected that ABC, MCK 1.58% and CAH 0.39% are all quite attractive technically to push higher, making this one of the top Sub-sectors of the US stock market right now in the short run.
Outside of these areas within Healthcare, Managed Care is also an area of focus, and names like ANTM, UNH, CNC, MOH and HUM also look to be pushing up to new multi-week highs as a group. Thus, while not as bullish as the Pharmas, or Healthcare Distributors, the Managed Care group also looks quite appealing in the short run, technically.
Finally, Medical Devices stocks look to be on the verge of pushing higher but are weaker than the sub-industry groups mentioned above. Thus, BDX, HSIC, PDCO, BSX are on the verge of breakouts, but are not yet there. This group, however, is also expected to work and can be overweighted.
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