Price Action & Performance
On a price basis, XLV broke out above intermediate term resistance at the $148 level and closes the month of July in consolidation above that level. The sector outperformed the S&P 500 by >3% on a relative basis, breaking a 6-month downtrend. Breadth measures expanded with 8 new 52-wk highs in July. All of these are positive near-term developments but come in the context of a 2yr bearish relative trend for the sector. We would expect a durable turn in performance to require further basing out (basing = price consolidation near lows over a material amount of time). We also note the Sector outperformed during a top-line correction for the S&P 500. Those conditions would need to persist to expect continued outperformance. Even adjusting our model for negative seasonals in August we see cyclical sectors in a strong position with better tactical setups in the near-term and supported by a stronger long-term bull trend. The question is whether we are setting up for a multi-month decline. Our process is not flashing those signals despite the rotation that happened in July.
Economic and Policy Drivers
The emergence of GLP1 drugs has had a profound impact on the Healthcare sector. However, after 2+ years of dominance by manufacturers like LLY, there has been a shift in performance driven by expectations of interest rate policy easing. Easing typically drives a bid for stocks, industries and sectors. It remains to be seen how the XLV will react to the upcoming election. Historically there have been components of both party’s platforms that have been seen as tailwinds to the industry, whether Democratic candidates mandating universal coverage, or Republicans proposing to boost efficiency by allowing insurance companies prerogative over who they cover. For the moment we find LLY in a near-term oversold condition and many other areas of the Healthcare Sector overbought. We dislike the setup for XLV unless we get a deeper correction in equities. We can’t foresee the catalyst at this point, so we go with the prevailing longer-term trend over the shorter.
In Conclusion
The XLV finally bounced in July, but we expect more basing/consolidation. Our Elev8 Sector Model is OUT of the XLV with a -12.08% allocation vs. our benchmark S&P 500
Chart | XLV Technicals
- XLV 12-month, daily price (200-day m.a. | Relative to S&P 500)
- Simply put, we’re not sure the XLV has done enough to shed its baggage of the past 2 years
Data sourced from Bloomberg
