On Monday, the equity markets started the quarter as strong as they ended the first one. The S&P 500 rose 1.2%, yet the healthcare sector was flattish red. It’s a bit concerning to see a sector fall as the rest of the market rallies. So is it time to bail out on healthcare stocks?
The answer is no, but it’s more complicated than that because of the political risk. For as long as I can remember, healthcare stocks have been the target of political hate. Both Democrats and Republicans like beating up on these stocks while they use them for their soap boxes. This became very true during the 2016 elections when both sides of the drug companies became political footballs. Even now, the Republicans want to repeal Obamacare, and both sides want to gloat about crippling their pricing models. Either way, healthcare and drug companies are in the crosshairs.
The overall macroeconomic environment still favors the long trade on Wall Street. But this sector has to swim upstream as it fights the added political current. It can do it but the approach is not as easy as finding good fundamentals to bet on. Going long healthcare stocks requires technical help and the positions should be as diverse as possible.
But there are a few strong tickers within the healthcare sector that I would trade right here regardless of the extrinsic threats. Here are three to consider:
Health Care Select Sector SPDR Fund (XLV)
First, I’d bet on a sector exchange-traded fund and there are many to choose from. At this stage, the Health Care Select Sector SPDR Fund (NYSEARCA:XLV) best represents the opportunity at hand. It is a basket of great companies proven for the long term. More importantly, and given all the geopolitical risk, the major tickers that make up the XLV pay a handsome dividend. This provides support if we were to have another market wide tizzy because of Brexit or the tariff wars.
Furthermore, Johnson and Johnson (NYSE:JNJ), Pfizer (NYSE:PFE) and United Healthcare (NYSE:UNH), which are the top three holdings and comprise almost 25% of the ETF, have reasons to continue to their rallies. So buying the XLV is an easy way to bet on the whole sector without the risk of specific stock headlines. We recently saw what happened to Biogen (NASDAQ:BIIB) when they announced the failure of their Alzheimer drug.
Johnson and Johnson (JNJ)
Late last year, Johnson and Johnson (NYSE:JNJ) had a headline scare and the stock fell 15% on the headline. They came under fire as they were accused of wrong doing with their Talcum baby powder product. The good news is that it is now clear that management didn’t act maliciously. Mistakes happen and sometimes they have tragic consequences but the real problems are when the companies do evil things and this is not the case.
Fundamentally, this is still a solid company with over 100 years of proven performance. It will take more than one incident to break it for good.
The other saving grace was that when JNJ stock fell last year it did so from an all-time high. This would have been necessary regardless, so the Talc headline merely pushed the time table a bit. This doesn’t diminish from the serious illnesses but from a stock perspective, investors over reacted on the headline and have since been clawing back their way.
The opportunity in JNJ stock lies in the technicals. Since the drop to $121 per share, the stock has steadily recovered with a series of higher highs and higher lows. The $134 ledge was important for the bulls to retake as it is pivotal.
Now JNJ stock is butting up against another potential resistance zone but it’s also an opportunity. If the buyers can breakout of $140.60, then they can spike again to target the all-time highs once more. This would also close the Dec. 14 gap. This won’t be easy and Johnson and Johnson stock will need the market in general to help.
The AbbVie (NYSE:ABBV) stock cratered on its last earnings report. But its problems started in January 2018 and since then, ABBV stock is down 35% from the closing high.
But therein lies the opportunity.
The descent in ABBV has developed a sharp descending wedge that needs to resolve itself soon. This is an intense series of lower highs and lower lows that is forming a bottom. The outcome from here is usually a sharp reversal and the bounce carries huge potential. But conversely, if the bottoming process fails, then it would become yet another ledge for even lower lows.
Since February, ABBV stock has had higher lows, which usually increase the odds that the bottom is in. But the bulls are running into a wall at the $81 per share zone. So they need a strong push into it so that they can fill the gap all the way to $86. This will be easier said than done but it is the technical opportunity here.
Meanwhile, it is imperative that the bulls maintain footing below, so they need to hold $79 per share, or else they risk losing the momentum that they so desperately need to breach the band of resistance.
Usually when a quality stock knocks on a roof so many times it increases the odds of breaking through at the slightest trigger. And the move that follows is usually exaggerated, so ABBV has a chance at some redemption.
This, of course, is a tactical trade, so I would set hard stop-loss orders for an escape if the short-term support fails.
The exact trigger for ABBV stock will be the next earnings report. The reaction to the last one was horrendous as the stock fell 15%. So this will be management’s chance to redeem themselves and deliver results that exceed expectations. Looking back in recent history there are no back-to-back negative ABBV earnings reactions on the stock chart.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
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