We had a modest long position in XLV last month on weakening downside momentum and some positive developments in the Biotech and Pharmaceutical industries. However, bullish catalysts in the form of weaker inflation reports and strong Tech. earnings have shifted focus away from lower vol. areas of the equity market again.
Price Action & Performance
The XLV lost ground by moving sideways in June, unable to entice investors who were looking to add risk instead. The price action has been sideways since XLV peaked in February, and with a weak start to July trading, the pattern is taking on a distributional look. Oscillator work has deteriorated, and breadth has as well giving it a bottom-3 score in our Elev8 Sector rotation model entering July.
At the industry level, Life Sciences stocks, HC Equipment stocks and HC Providers are all sitting at 52-week relative lows vs. the S&P 500. Further interest rates started firming towards the end of the month as Equities moved higher. Neither development has historically coincided with high probabilities of XLV outperformance.
Economic and Policy Drivers
The emergence of GLP1 drugs has had a profound impact on the Healthcare sector. While the chart of Eli Lily (LLY) is still one of the strongest in S&P 500, success of that product has potentially cannibalized several other prominent healthcare business lines. As investors bet on a reduction in the number of various surgeries required, cases of diabetes, traditional weight loss, and many other areas associated with a broad reduction in obesity and related illness, many other stocks in the sector have seen their prospects deteriorate. The emergence of inflation in 2022 helped the sector by arresting the advance of the broad market and allowing some of the more stable business lines in the sector like managed care (UNH, ELV, MOH) and Pharmaceuticals to add value to investor portfolios. There are several strong stocks in the Sector like LLY, MRK, BSX, VRTX, but many equipment and supply names are struggling. With the bull trend gaining steam as inflation dissipates, we are seeing less motivation to own XLV.
How Can XLV Help?
XLV can help portfolios by offering the ability to pivot quickly if inflation morphs from a fading concern to a full-blown problem like we had in 2022. That year the HC sector outperformed in 11 out of 12 months. As is, we’ve mentioned several strong individual stocks that are still in a good position and oversold defensive shares are typically a good thing to own when equities correct.
In Conclusion
The XLV has continued to deteriorate and has been a large underweight in our process since the bull market started in early 2023. We swung and missed on a tactical signal in June and our model inputs are negative this month landing XLV as one of our 0% sectors for July. Our Elev8 Sector Model is OUT of the XLV with a -11.72% allocation vs. our benchmark S&P 500
Chart | XLV Technicals
- XLV 12-month, daily price (200-day m.a. | Relative to S&P 500)
- Underperforming despite testing up to resistance in June. Oscillator work is flashing a sell signal on the MACD (3rd panel)
Data sourced from Bloomberg
