Health Care Archives | Opportunity Identified

October 13, 2017 | Posted by David Zarling, Head of Investment Research

How To Get Involved In The Drug Trade (It’s Not What You Think!)

Eli Lilly & Co. (ticker: LLY), one of the world’s largest drug manufacturers, has seen its stock go nowhere for 2 years. We don’t know many participants who would like a 0% return for 24 months. But this nowhere action is perfectly normal behavior. After all, Eli Lilly was up over 350% from the bottom in 2009 through September 2015. That’s a pretty nice return, but trees don’t grow to the moon and LLY couldn’t continue that pace without some digestion. And since September 2015, LLY has corrected and consolidated through price and time. If you’re familiar with our work, you know corrections through price and time provide opportunities. By studying supply and demand, we can identify when an opportunity with low risk / high reward characteristics is upon us. Eli Lilly is another such opportunity. Last week, LLY broke out of the aforementioned 2-year base. Check it out:

Not only that, but LLY is on the verge of breakout out on a relative basis versus the S&P 500. We like absolute and relative breakouts. And we like large bases. From large bases come high spaces. The 2-year base built by supply and demand is large and has strong polarity characteristics. For those non-believers who think buyers and sellers don’t remember the prospects of a stock from 17 years ago, we present the following:

Historical prices have significance. They are not random as some would have you believe. But we digress. Let’s identify how to get on the right side of the trade with LLY.

Here’s the daily chart of LLY:

Buyers drove the price of LLY above $85. We’ve seen a subsequent retest of that important level. Everyone has their own time frame and objective. But to us, it makes sense to own Eli Lilly above $84. With an upside target of $105, the reward-to-risk ratio is tilted in our favor. Below $84, and we’re wrong. After all, we’re not in the market to be right. We’re in the market to make money, which means being on the right side of the trade.

In conclusion, Eli Lilly has just broken out of a large 2-year base with the potential for a nice reward (about 20%) and defined risk (about 2%). We like this 10:1 tilt in our favor. As always, price knows best. Trade at your own risk.

You can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to a great tool we’ve created, The Ultimate ETF Cheat Sheet. Click this link to get your FREE easy-to-use resource guide for all your ETF needs.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in this blog. Please see our Disclosure page for full disclaimer.

June 5, 2017 | Posted by David Zarling, Head of Investment Research

Check Out This Major Sector Returning To Health (And Ready To Lead Market Higher)

If you bring up the topic of Health Care for discussion in the United States, it’s likely to generate a wide variety of opinions that invariably revolve around one’s political or world view. Thankfully, we don’t need to let politics into our portfolio. After all, the market doesn’t care about our political views. The market is going to do what the market is going to do. It’s going to reflect the balance between supply and demand of all market participants. It’s based purely on the economic law of supply and demand: more supply than demand, price goes down; more demand than supply, price goes up. This is a simple market reality often lost by the daily noise factories of financial media and academia. We can argue with price all we want, but it is the final arbiter of value. And for the past two years, it’s a fact that the U.S. Health Care sector, from a price standpoint, has gone absolutely nowhere. That is, until last week. Take a look:

Since July 2015, Health Care has gone nowhere. For 2 years, this important U.S. sector has been correcting through time. During this time frame, Health Care (represented by ETF XLV here), experienced a 16% drawdown. But when we look at it from a long-term perspective, the sideways price consolidation is most prevalent. And when we look at it compared to the overall market (using the S&P 500 as our proxy), we can see market participants had no business owning Health Care during the past 2 years:

Health Care represents approximately 14% of the S&P 500. When we look left, we see that from 2011 through mid-2015, Health Care was a major factor in leading the S&P 500 higher. Of the major market sectors during this time frame, Health Care was one of the best. That changed in 2015 as the Health Care selloff affected the broad market overall. Since mid-2015, Health Care has not been a sector worth owning. With the recent breakout of Health Care on an absolute basis, this relative underperformance could be changing and would be an important development in leading the overall market higher.

We can make money in Health Care (using XLV) with proper entry and risk management. Using the daily chart below, we can tactically identify risk, our number one priority as market participants.

The $73.50-74.50 level is an important one. In 2015, and again in 2016, sellers showed up at this level to drive price back down. The recent break above this level is important, as polarity is now in play. Meaning, once an area of former supply is broken, it should now serve as an area of support. Of course, nothing is guaranteed, which is why every market participant needs an exit plan prior to entry. When is this trade wrong? If price moves below 73.50-74.50, it no longer makes sense to own XLV. A sustained amount of time above this level will signify buyers are in control and an initial target of $90 is on the table. That’s a 16% gain and represents a reward:risk ratio of 5:1. We like that.

In the end, it’s quite simple. It makes sense to own XLV above 73.50-74.50 (depending on your risk tolerance). Below that, it can be someone else’s problem. As always, trade at your own risk. It’s our responsibility to stay on the right side of the trade regardless of our opinions.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to a time-saving tool we’ve created, The Ultimate ETF Cheat Sheet. Click this link to get your FREE easy-to-use resource guide for all your ETF needs.

March 6, 2017 | Posted by David Zarling, Head of Investment Research

Sector Rotation Provides Clues About Current Market Environment

The move in U.S. stocks over the past few months has been impressive. The rapid move has talking heads on TV proclaiming, “we’re overbought” and chances are, you or your neighbor think “this won’t end well.” Unfortunately, “overbought” is an ambiguous, bias-confirming adjective and “this won’t end well” is not an investment plan. Frankly, markets can stay “overbought” for a very long time (see 1995-2000). And those who lament, “this won’t end well”, will eventually be right; five weeks from now or five years from now. Neither of the aforementioned adds any value to the decision-making required to participate and profit in markets. If we’re going to make money in the markets, we need to understand how they operate and have an if/then plan ready to go. One of the more important aspects of understanding a market is looking underneath the surface and identify the undercurrents impacting supply and demand. An important exercise we can implement is studying sector rotation, which takes place as money moves from one industry sector to another. This process can give us clues and insights into the current market environment. Let’s put the work in.

At 360 Investment Research, we like to take advantage of Relative Rotation Graphs (RRG) Charts™ [1]. These charts show you an investable asset’s relative strength and momentum relative to a collection of other securities. Developed by Julius de Kempenaer of RRG Research, RRGs help us identify where we should be invested, or be looking to invest, within a universe of investments. Decisions should not be based solely on RRG analysis, but these charts definitely help us focus on those areas of the investment universe that deserve it. They give us the big picture within one picture. We appreciate their usefulness in observing sector rotation and you should too.

Using RRG™ analysis, we’re going to look at the relative strength of the U.S. Market’s largest sectors, using the S&P 500 as our benchmark. Basically, we want to see where in the U.S. Market money is moving and where we should be focusing our attention. We want to observe sector rotation from a momentum point of view. Accordingly, we’re going to use the following ETFs representing the 9 largest U.S. sectors and compare them against the S&P 500:

XLP (Consumer Staples)
XLY (Consumer Discretionary)
XLE (Energy)
XLF (Financials)
XLV (Health Care)
XLI (Industrials)
XLB (Materials)
XLK (Technology)
XLU (Utilities)

In the RRG™ below, the long tails represent the movement of each sector’s ETF over the past 7 weeks in comparison to the S&P 500 ETF, SPY. What do we see? The first thing to notice is the chart of SPY in the upper right corner. U.S. stocks have been moving upward in a positive trend. A series of higher highs and higher lows is about a simple as it gets in identifying an upward trend. Accordingly, when we analyze this chart, we want to be cognizant of the fact U.S. stocks as a whole have been a pretty good place to be.

Over the past 7 weeks, we can see there’s been some decent sector rotation. Right away, we notice three sectors in the blue upper left quadrant improving together. They used to be laggards during the strong push upward in the S&P 500. Over the past month and a half, these laggards have shown quality improvement. The three sectors are Consumer Staples (XLP), Health Care (XLV), and Utilities (XLU). Is there anything these sectors have in common? I thought you would never ask. These three sectors are considered defensive (or low beta) sectors. Money managers will move money into these sectors if they are undervalued or to protect assets during a decline in the market. After all, people get sick, need toilet paper, and buy electricity regardless of economic conditions (for the most part). So this improvement could simply be a healthy rotation, providing further fuel to the upside, or a warning that a decline in the market may be upon us. Before we go jumping to conclusions, it should be noted that a decline could be anything from -1% to -100%. As humans, we have this weird quirk where we assume the worst. It’s part of our fight or flight survival instinct. There’s nothing wrong with it unless this reaction clouds our vision so badly we make poor investment decisions. In order to get more clarity, let’s look at each of these three sectors individually from a price perspective.

First, Consumer Staples. Here’s the weekly chart:

Demand for Consumer Staples since late 2016 has driven XLP up to an area where sellers have shown up in the past. Interestingly, we notice XLP broke above a similar area of supply (the lower shaded area), which turned into support. That breakout took place in February 2016. You guessed it, while the S&P 500 was bottoming after the worst start to a year on record, Consumer Staples was breaking out. If XLP can break above the current level of supply near $55, it might not necessarily be a bad thing. This sector could be signaling the next leg up and be a leader in the overall market.

Next up, Utilities. No electricity = no wi-fi = armageddon.

Similar to Consumer Staples, Utilities were breaking above prior resistance (middle shaded area) in February 2016. Further back, we can see Utilities were a relatively safe place to be during the market upheaval taking place in late 2015. In fact, from late 2015 through early 2016, the Utility sector outperformed the other 8 major sectors. And just like Consumer Staples, XLU is at a very important level. The $51 handle marks an area where sellers have shown up in the past.

Finally, Health Care’s weekly chart:

This one is both the same, yet different, from the aforementioned sectors. Hwut? I know. Mind blowing.

First, let’s stick with the similarities. Health Care (XLV) bottomed via a false breakdown (price moved below previous demand and quickly reversed up) in February 2016 along with the rest of the market. That’s where the similarity ends. Looking further left on the chart, it’s apparent demand for this important sector was high for several years in the past. In fact, XLV outperformed the S&P 500 each year from 2011-2015. That’s five years of market leadership. If this important sector could retake its leadership title, it would be a tailwind for the broad market. And just last week, it showed signs of doing just that as buyers drove price through an area where sellers had shown up urgently twice before. This breakout is significant. The longer Health Care can stay above $74, the more likely this sector will recapture its market leadership title. Keep an eye on this one.

In conclusion, the last few weeks have seen defensive sectors improve dramatically. This sector rotation could be a harbinger of an incoming broad market decline or a sign of healthy undercurrents for this raging bull market. We don’t need to predict what’s next. We’ll watch price instead. Price keeps us on the right side of the trade and knows more than we do.

As always, you can see our daily market thoughts on Twitter @360Research

AND, you’ve got FREE access to an investing tool we’ve created, The Ultimate ETF Cheat Sheet. It’s an easy-to-use resource guide.

[1] Note: The terms “Relative Rotation Graph” and “RRG” are registered trademarks of RRG Research.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

November 20, 2014 | Posted by David Zarling, Head of Investment Research

Leader of the Pack [Weight of Evidence, Part 5 of 7]

At 360 Investment Research, we like to dig deep into the market and take a look at what sectors are leading the US market upward. By analyzing sectors on a relative basis against the S&P 500, we can gain insight into what sectors are leading the charge. This, in turn, may provide clues on where we are in the market/economic cycle. The theoretical market/economic cycle is a model based on the work of Sam Stovall in his book, S&P’s Guide to Sector Rotation. The basic premise is that different sectors are stronger at different points in the economic cycle. StockCharts.com has done a great job elaborating on this rotational cycle. The chart below is courtesy of StockCharts.com. It does a good job of visualizing these relationships and the order in which each sector should outperform in the context of the overall market. Moving from left to right, we see that Cyclicals (or Consumer Discretionary) and Technology lead the market out of bottoms. Industrials, Basic Materials, and Energy lead during a Bull Market. And Staples, Healthcare, Utilities, and Finance are the safe havens during Bear Markets. It’s not as clear cut as what I just wrote or what is visualized below, but it is a really great guide to the likely relative performance characteristics of each sector as the market progresses.

Researching approximately how each sector is performing can be a good exercise in determining where we might be in the overall market cycle. Obviously, if we’re in a healthy Bull Market, we want to see Bull Market leaders like Technology, Industrials, Materials and Energy outperforming (or leading) the overall market. Conversely, we would be concerned about the overall prospects of the market and economy if we see that big money is moving into defensive sectors like Staples, Healthcare, and Utilities. So let’s dig in and see what sectors are leading the overall market.

One of the best ways of observing which sectors are doing the best and which sectors are lagging is through the use of Relative Rotation Graphs (RRG) [1]. RRG charts show us the relative strength and momentum for a group of stocks or ETFs. These stocks or ETFs are compared against a benchmark. In our case, we’re going to compare the aforementioned sectors using the overall market (the S&P 500) as our benchmark. That is to say, the performance of each of these sectors will be compared against the performance of the S&P 500. If a sector is outperforming the market, they are said to be the leaders. If a sector is underperforming the market, they are the laggards. On the RRG chart below, the following ETFs are being used as proxies for each sector:

XLY (Cyclicals or Consumer Discretionary)
XLK (Technology)
XLI (Industrials)
XLB (Materials)
XLE (Energy)
XLP (Staples)
XLV (Health Care)
XLU (Utilities)
XLF (Financials)

Of the ETFs above, those with strong relative strength and momentum in comparison to the S&P 500 appear in the green Leading quadrant. Those with relative momentum fading move into the yellow Weakening quadrant. If relative strength then fades, they move into the red Lagging quadrant. And when momentum starts to pick up again, they shift into the blue Improving quadrant. In the RRG below, the long tails represent the movement of each sector over the past 20 weeks in comparison to the S&P 500. So what do we see? We see that XLV, XLU, XLP, and XLF have moved from positions of weakness and laggards to positions of leadership. Health Care (XLV), Utilities (XLU), Staples (XLP), and Financials (XLF) – defensive sectors – are leading this market. On the other hand, Technology (XLK) is weakening while Energy (XLE), Materials (XLB), and Cyclicals (XLY) are lagging. Bluntly, defensive stocks are leading and those who we want to lead a Bull Market are lagging. Money is flowing into defensive sectors. This is not what a healthy and powerful Bull Market looks like. Does it mean that this the top of the Bull Market? No one knows that. But, enough money is flowing into defensive sectors that investors like you and me should take notice.

[1] Note: The terms “Relative Rotation Graph” and “RRG” are registered trademarks of RRG Research.