Healthcare showing divergence

I noted on my last blog that several of the S&P500’s major sectors failed to confirm the S&P500’s new highs on May 22nd.

One of those sectors that failed to confirm a new high was the healthcare sector. This is particularly important because healthcare has been a prime driver of the bull market recently.

The S&P healthcare sector (XLV) shows typical bull market characteristics in most regards–and as such, should continue to be considered in a bull market until the trendline is broken. However, you may want to watch for continued divergence on the MACD, RSI and Stochastics indictors against the trend. I’ve marked these divergences on the chart below. If you’ve read my book Sideways, you know that I place trend as the top priority, and momentum studies as less important to your decision making. However, diverging momentum can be considered a “yellow alert” for investors to be extra mindful of a potential change in trend.

xlv

Biotech, a somewhat related sector to healthcare, is also showing potential signs of diverging momentum indicators. The XBI ETF is – like healthcare- in an uptrend. As with healthcare, I would recommend staying with the trend if you are long the sector – but keep an eye on this divergence, and on the trendline. Sometimes you get false signals on momentum divergences, but I’ve seen enough accurate follow-through to pay attention to these signals.

xbi

View Keith’s BNN Top Pick’s segment

Click here to view the BNN Top Picks segment of MarketCall last Friday.

6 Comments

  • Looks like the market (SPX) is finally correcting. And if it does you called it. Very timely.

    Reply
    • Hi Dave–not sure if I am confident enough to say I will ever call a market top or bottom with precision–I just look at leading factors like breadth and sentiment and then assess the risk/reward potential from there.
      At this point, the risk/reward is getting worse – but the timing of a correction, if any, is hard to predict.
      But thanks for the kudos, appreciate your ongoing support.

      Reply
  • Keith,

    Very clear article as usual. Could you comment on the possible significance of Accum/Dist in each case? In both cases that indicator is in an uptrend. Does this mean that buyers are continuing to accumulate stock (not necessarily ‘smart money’, I appreciate)?

    Man thanks,

    Brian

    Reply
    • Brian–Accumulation/Dist. line supports the uptrend by showing us that money is moving into it- again, the trend is firm, people are buying this sector. The only sign of caution is the diverging momentum–in other words, people are still buying, but the momentum of price growth, while still positive, is slowing. At least at this point. Its a shot over the bow, so to speak, but not a reason to jump ship at this point.

      Reply
  • Hi Keith,
    I was considering putting some of my cash into HFR (Horizons Floating Rate Bond ETF). It is currently trading at $10.12. I was looking at the chart and it seems to have a lot of support going back to 2012. Would you recommend this to put cash while I am waiting for a possible market correction. Thanks.

    Reply
    • I’ve used it before–but I have migrated over to buying either Home Capital or Equitable Bank high interest savings accounts–both of which can be bought as mutual fund units. No volatility, almost as much yield

      Reply

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