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Health Care Stocks Are Looking Sick, Charts Say

Health Care Stocks Are Looking Sick, Charts Say

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 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 the price of its EpiPen product. 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.

But it is the bigger stocks, by market capitalization, that really control the drug group’s fate. For example, Gilead Sciences ( GILD ) which is also 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 very interesting case beyond the obvious. It is, however, 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.

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 was showing signs of weakness before that news hit. It also released lackluster second-quarter earnings in July.

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