Health Care Stocks Are Looking Sick, Charts Say

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Lucille Barrett
Lucille Barrett
Future teen idol. Hardcore tv lover. Social media guru. Zombie aficionado. Travel scholar. Biker, shiba-inu lover, audiophile, Mad Men fan and proud pixelpusher. Working at the junction of minimalism and elegance to answer design problems with honest solutions. I'm fueled by craft beer, hip-hop and tortilla chips.

While energy, gold, and technology took their turns in the spotlight, health care had been one of the market’s darlings since 2011. It outperformed from February 2011 to July 2015 by gaining 133% vs. the Standard & Poor’s 500’s 56% increase.

But something happened one year ago to change the sector’s tone. The “what” is not as important as the fact that it did; since that time, health care did worse relative to the market. And over the past month, it has done worse on an absolute basis as well.

The healthcare ETF is still above the trend line supporting its rally all year, but it did dip below its 50-day average last week with fairly heavy volume. More technically inclined investors will also notice a shift in short-term moving averages that suggest the tide indeed has turned for the worse.

As are many sectors, healthcare is a diverse group, and there are two subgroups – pharmaceuticals and service providers – that now show real weakness.

Mylan ( MYL ) stole the headlines earlier this month when it jacked up its EpiPen product price. It took a few days, but the stock was punished with a double-digit percentage decline in just a few days. The technical breakdown was clear, and now Mylan shares are actually on track to revisit the bottom of a giant, yearlong triangle pattern. In other words, Mylan stock is fully in bearish hands.

The bigger stocks, by market capitalization, really control the drug group’s fate. For example, Gilead Sciences ( GILD ), classified as a biotech stock, dipped to a 2 ½-year low Monday morning.

And the giant Pfizer ( PFE ) scored a massive technical reversal last month by setting a new high for the year and then closing the week below the lows of the four prior weeks (see Chart 2). What makes this worse was that second-quarter results, released Aug. 2, topped analyst expectations. Bad action on good news is decidedly bearish, and the technicals back that up. This stock stabilized into a tight range over the past few weeks, but the rising trend from the start of the year is clearly broken to the downside.

The other group that seems to be weighing heavily on healthcare is service providers, including insurance companies, laboratories, and assisted living facilities. UnitedHealth (UNH ), the biggest member of the group and, like Pfizer, a member of the 30 Dow Jones Industrials, shows a fairly clear downside trend break last week (see Chart 3).

UnitedHealth has all the usual technical negatives I often cover, from waning momentum to falling cumulative volume, so it does not present a fascinating case beyond the obvious. However, it is the largest stock in this subgroup with a market cap roughly equal to the sum of the next four stocks, so its fortunes really dictate the subgroup’s fortunes.

Health Care Stocks

The next largest stock is pharmacy benefit and management service provider Express Scripts Holding ( ESRX ). With a more dramatic move, it broke down hard last week (see Chart 4). Some blame fallout from the EpiPen kerfuffle, but the stock already showed signs of weakness before that news hit. It also released lackluster second-quarter earnings in July.

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