Still waiting on health care

Key Points

• The health care sector is presently signaling favorable developments in a wide variety of factors
• The ratio of insider buying versus selling has been decidedly bullish of late
• Both breadth and sentiment have fallen to a deeply oversold level - i.e., bullish on a contrarian basis
• Correlations among health care stocks have increased dramatically, which typically suggests market investors are indiscriminately "dumping" stocks in a given sector
• Health care has a history of performing better than almost all other sectors when inflation is high and interest rates are rising - a situation we find ourselves in today

Insider buying

The action in corporate insider buying and selling for the companies that comprise ticker XLV (Health Care Select Sector SPDR Fund) continues to unfold in a manner that has historically been favorable for the health care sector.

The chart below displays ticker XLV and when our Corporate Insider Buy/Sell Ratio - XLV crossed above 0.079. The table shows a summary of XLV performance following previous signals.

Another take on insider buying involves our Corporate Insider Buy/Sell Velocity - XLV indicator, which compares the 4-week change in insider buying to the 4-week change in insider selling to highlight extremes.

The chart below displays those times when this indicator crossed above 50, and the table summarizes XLV performance following previous signals.

Breath

The chart below displays those times when the 5-day average of % XLV stocks > 50-day average crossed above 16, and the table shows a summary of XLV performance following previous signals.

Sentiment

The chart below displays all days when the 10-day average of XLV Optix was below 21, and the table displays a summary of XLV performance following previous signals.

Correlation

The chart below displays all days when the XLV Component Correlation indicator crossed above 0.65 for the first time in six months. The table shows a summary of XLV performance following previous signals.

High Inflation and Rising Interest Rates

I tested S&P 500 Sector performance back to 1926 when BOTH:

• CPI 12-month % rate-of-change > 4%
• 10-year treasury yield > its 7-mo. EMA

The Health Care sector was the second-best performing sector when inflation was high and interest rates were rising (Energy showed the largest net gain, but with a much greater degree of volatility and much larger maximum drawdown).

The chart below displays the growth of $1 invested in the S&P 500 Health Care sector ONLY when inflation was above 4%, AND the 10-year yield was above its 7-month EMA.

Not necessarily a "pretty picture," but on a relative basis, this was about as good as it got for any stock sector when inflation was high and interest rates are rising.

What the research tells us…

The good news is that the health care sector is presently flashing about as many favorable signals as a sector ever does at one time. In addition, it has a track record of holding up (reasonably well) when inflation is high, and interest rates are rising. The bad news is that there are never any guarantees in the stock market, particularly in the teeth of a major decline.