Relative Strength & Momentum in Healthcare

JC Parets
February 11, 2019

When it comes to buying stocks, I'm a bigger fan of buying things that are already working rather than getting cute and trying to be the first one in hoping others agree with me quickly. Rarely does bottom fishing work out in our favor. The probabilities are against us from the start.

One way to see if something is already "working" is to recognize how it is behaving compared to its peers. In the case of U.S. Stocks, how are specific groups doing compared to the rest of the market? I like to think of it like holding a basketball in a pool under water. You can feel the pressure, similar to overall selling pressure in stocks. Once you let go, the ball explodes out of the water and into the air. Stocks behave the same way once the overwhelming selling is complete. 

An interesting space we've been watching is in Healthcare. This is a monthly chart of $XLV that stood out during my end of month work and I think it really shows how well this space has held up. If we're above 90, we need to have long exposure in the Healthcare space. This level represents a cluster of important extensions based on both the 2007 and 2015 corrections. Finally being able to get through that after an entire year of consolidating would be very impressive:

Click on Charts to Zoom in

There are two names in particular that stand out from a structural perspective. "Structural", meaning that these are longer-term charts with longer-term horizons and certainly not swing trades, or god forbid day trades. These are the types of stocks we want to be buying on weakness and/or after consolidations.

The first one is Waters Corp $WAT making all-time highs. The one thing we know about new all-time highs is that it is not characteristic of a downtrend. If we're above 210, this is one we want to own with a target just under 330:

The second one is Eli Lilly $LLY also making new all-time highs. If we're above those former highs from the Summer of 2000, we want to be in this one from the long side. The next upside objective is near 150.

I like the risk vs reward in these stocks. The strength in the sector and sub-industry level certainly stand out.

The stock market is a sideways mess right now. (Check out this Youtube Video where I explain this)

But I believe there are good opportunities within individual names. I HATE to say that it's a "Stock pickers market". I really do hate that. But it is.

JC

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