Wednesday, October 19, 2016

Chart Talk {10.19.16}

Today I wanted to draw attention to the chart of the health care sector ETF, XLV, because I think it gives you a look into your thought processes on securities.  {You can double-click on this to make it larger.} Before we do that you need to read the following disclosure: 

I own this ETF for clients and in personal accounts.  I also have recently added small amounts of XLV to certain client accounts and to certain personal accounts.  If you are reading this and you are not a client of ours then understand that I invest for my clients based on my understanding of their unique investment mandates.  For others reading this post you should know that what is written here is provided for informational purposes only.  You should NEVER invest in anything you read here or anyplace else without first doing your own investment homework or understanding how a particular investment fits into your own unique risk/return profile.  Nothing here should be construed as a recommendation to do anything with any particular security.  I assume no responsibility for any actions you may take after reading anything on this blog.  THERE IS A POSSIBILITY YOU COULD LOSE MONEY PURCHASING THIS OR ANY SECURITY!    If you are not a client of ours then you should never take any action on anything you read here or anyplace else without doing your own homework, talking to your own investment advisor or better yet, hiring us.

I wanted to point out the characteristics of XLV in light of its being down nearly 9% from its highs last summer.  I want to make note of this because there are some interesting things going on here.  First, let's go through all the negatives.  Obviously health care has been one of the whipping boys this political season with companies being called up to testify before Congress on suspicious drug price increases.  Also a now expected Clinton Presidency is not seen as a positive development for the sector.  As such investor sentiment has turned very negative on the group.  This is expressed in how the sector has been trading and that picture isn't pretty.  First off, XLV has printed a series of lower highs and lower lows which can be visually seen not only in the chart above, but also by that downward sloping green trendline in its northeast corner.  XLV is trading below several key moving averages that investors pay attention to.  Also, although not noted in the chart above it recently broke technical support represented by that horizontal blue line running just north of where it's currently trading. 

Yet perhaps sentiment is starting to become too negative.  XLV is now very oversold by our work in multiple time frames.  It has also entered a region where it has found prior support.  At these levels the ETF carries about a 1.5% dividend yield and is now down on the year by about 2% so valuation would seem to be more attractive.  

XLV is at a juncture where the risk reward characteristics are becoming attractive.  I say becoming attractive because I think there is a possibility that it may have some more room to go on the downside.  I also think that it is vulnerable to a general market decline from here {should one occur} just like almost everything else.  However, probability suggests the risk and the negatives are now generally known here and are in the process of being discounted.  Should it break down from here then the next level of support by our work is between 66-68 on its chart.  I think that gives XLV an interesting risk/reward characteristic for those with an appropriate time span.  The time span we use for investors is 6-18 months.  As I said earlier, the ETF has about a 1.5% yield so at least you're getting paid something to wait.  Finally if it simply moves back to the upper levels it saw last summer then you would see something like a 7-8% return on your investment.

Again this is not a trade and I think there's a real likelihood that XLV could see lower prices before it moves higher so probability suggests there is still risk to the downside.  Since they don't ring a bell at the bottom or top of a market or sector's trading cycle, I would at least put the ETF on your watchlist.  Largest current positions in XLV according to Morningstar are Johnson & Johnson, Pfizer, Merck, United Health Group and Amgen so some real blue chips in here.

Chart is from although the annotations are mine.