The Technician: Health Care ETFs Gaining Strength

August 01, 2008

Technical signals show IYH and XLV have staged a breakout. But expert chart tracker remains wary of the bigger picture.

Jerry SlusiewiczThe market is in a classic tug-of-war. We've had 200-point swings on the Dow Jones Industrial Average four times this past week alone.

Obviously, investors are witnessing a market in turmoil. The oil and financial sectors continue to provide headline shock for nervous investors. So that begs the question: Is there anything to like in the market today?

The good news is through analyzing underlying business fundamentals and applying technical analysis to decide when and where to make buy and sell decisions, there are at least two exchange-traded funds that appear quite attractive right now.

And they're not inverse or fixed-income funds, either. The ETFs we're moving closer to adding in our portfolios track the same sector that investors have been turning to when times get bad for decades.

Check out health care. In tough economic times, it's important to invest defensively. And that's proving true now. For example, the iShares Dow Jones U.S. Healthcare (NYSE: IYH) has been going up lately. In the past three months, IYH has gained nearly 3% while the S&P 500 is down close to 8% in that same period.

Since June 27, just over a month, IYH is up nearly 7% while the broader market is down about 1%.

It's important to note that IYH has been trading around 63,500 shares on an average day. On Thursday, shares of IYH broke above their resistance level when it closed at $65.18. But volume was just average. With a stock, we'd like to see volume rise to confirm a breakout. But with an ETF, that correlation isn't technically as tight.

IYH's breakout came after an eight-week basing formation, also referred to as a cup-with-a-handle. Interestingly enough, Health Care Select Sector SPDR (AMEX: XLV) also confirmed that breakout by hitting a high of $32.32 yesterday. Its resistance level had been $32.20. Volume on XLV was slightly more than its recent average.

The top holding in both IYH and XLV is Johnson & Johnson. It makes up 11% of assets in IYH and 12% in XLV. That stock is trading just below its all-time high. On July 24, J&J was at $69.25 per share, which is pennies away from $69.99, which was the stock's record peak set in April 2005.

Some other major holdings are within 10% of their all-time highs. That includes Abbott Labs, which is trading near $56. Its record was set earlier this year at $61.09. And Amgen gapped up on Monday by double-digits and by the end of the week is trading near its 52-week high.

Besides the technical factors, we like the fact that whether inflation picks up or real estate continues to falter, people are going to remain concerned about their health. We're seeing a sector that's leading others at the moment and going through a breakout. So we're watching two very positive technical indicators showing up to support underlying long-term business fundamentals for investing in health care.

But we haven't bitten the bullet yet on either IYH or XLV. It's our most favorite sector and meets all of our technical and fundamental criteria for buying an ETF.

Clouds are hanging over the sector as well as the broader stock market. Whether we have more pain before hitting a bottom is much in doubt. Even from a technical standpoint, it's too early to tell. From July 15 to July 23, stocks rallied. Then, we saw a pullback for a week. Subsequently, stocks rallied again until Thursday.

The problem is that the high hit by the S&P 500 and the Dow Jones Industrials on July 23 still haven't been breached. That's what we need to see happen to provide more confidence that we're truly in a new uptrend.

From a fundamental point of view, U.S. investors would love to see oil prices keep sliding, hopefully closer to $100 a barrel. That would give the rest of the economy more opportunity to grow. Right now, it's too early to tell whether a longer-term uptrend in oil is broken.

So our hesitation with IYH and XLV relates more to the overall market than health care as a sector. We'd like to feel a little more comfortable that the broader market has actually bottomed.

If the market can take out its high set on the 23rd, we'd probably have no problem with moving forward in either IYH or XLV. That would mean the S&P 500 needs to get to 1292 (we're at 1257 at mid-day on Friday, Aug. 1). Likewise, the Dow Jones Industrials index has to pass 11,700 (now at 11,306).

Jerry Slusiewicz is president of Pacific Financial Planners in Newport Beach, Calif., and his columns appear regularly on He can be reached at: [email protected].

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