With stocks struggling this week after pushing into overbought territory — and moving lower on Friday in reaction to the weak July employment report — one of the few sector groups to catch a bid have been healthcare stocks.
After spending months in the wilderness, the Health Care SPDR (NYSE: XLV) demonstrated some relative strength against the broad market this week and has pieced together an impressive string of gains. Since July 30, the XLV is up 5.7% compared to a 1.6% gain for the S&P 500. This is a big reversal for health care stocks: During the market’s rise out of the February low into the April high, the XLV lagged the S&P 500 by a whopping 13%.
The context for all this is that despite the solid foundation and broad participation of the stock market rally out of the July low, investors are turning slightly more cautious on the margin. You can see this in the way that defensive assets like health care stocks and gold are starting to perk up again, and of course utilities and energy MLPs have been rolling for two months or more.
This doesn’t mean a meaningful pullback is necessarily in the cards. It just means that the rally we have enjoyed out of the July 1 low is entering a more mature phase. And as a result, we should expect the market’s upward movement to become a little less coordinated.
In other words, instead of seeing risky assets move higher together as we did throughout much of July investors will begin analyzing individual stocks and sector groups more closely, and only bid higher the ones showing the most promise. And that means that laggards like healthcare enjoy a period of outperformance as investors swing back to pick up stocks that missed out on the initial rebound rally.
My favorite play in this space is nimble drug maker Keryx Biopharmaceuticals (NASDAQ: KERX). Shares are breaking up and out of three month pullback as the intermediate-term uptrend resumes. I’ve added shares to my portfolio at
26 Broken Stocks to Sell Now. There’s a long list of companies that have jumped off their lows but are still trading at dirt-cheap prices. But BEWARE: these bargain stocks aren’t just cheap, they’re broken. Get their names here or risk losing your shirt.
