During broad market uptrends, the bad ones catch up to the good… and not the other way around.
Losers become winners.
Laggards turn into leaders.
By the time it’s all said and done, and the cycle is over, most areas of the market have participated to the upside.
This is exactly how I’m thinking about groups like small-caps, healthcare, or even pot stocks these days.
“It’s getting late! Are these guys ever going to join the party?”
The answer is likely to be yes for most things.
And in the case of healthcare, there is strong evidence these stocks are showing up to the party as we speak.
Here’s SPDR Health Care $XLV zoomed out about 10 years with the 2-day rate of change in the lower pane:
This week’s surge is what we call starting line momentum.
XLV was up about 5.5% between Tuesday and Wednesday, logging the largest two-day rally in healthcare since the 2020 pandemic cycle. There was also an extreme reading in this indicator at the late 2018 lows.
These momentum spikes tend to mark inflection points, and happen at the beginning of uptrends, not the end of them.
It’s been the case throughout history, and I think it’s going to be the case again this time around.
It’s also important to note where this momentum reading is occurring on the price chart.
This week’s rip broke XLV out of a 6-month base with authority, reclaiming its all-time high VWAP and the 38% retracement in the process.
That all just happened in the past few sessions!
Now consider the fact that healthcare hasn’t really participated for the past year. It’s been one of the worst places to be, in a steady downtrend since last summer.
Investors are basically ignoring these stocks at this point… just as the trend is reversing course to the upside.
And that kind of sentiment can really magnify moves, especially when fear is replaced by relief, which is what seems to have taken place after the announcement at the White House Tuesday.
The agreement between Pfizer and the US government looks to have been a clearing event for the regulatory uncertainty hanging over the sector.
So let’s recap… just as sentiment appears completely washed out, we’re seeing a bullish initiation reading as healthcare stocks bottom and reverse higher… And as it’s happening, big pharma is doing deals with the government.
What a setup, right!
Remember, big moves start with big moves. That’s what’s going on here.
So it’s time to dance with healthcare for as long as the music is playing.
They finally made it to the party.
Have a great weekend.
Steve
We’ve been building some healthcare exposure in preparation for this moment. We’re already up about 100% on our Merck calls, and this week, we added a position in Gilead. That trade is still actionable as the calls have barely moved.
