Sanofi’s potential Big BASE will be complete on a move to a new all-time high, above its 2015 peak of 101.1. However, the stock’s current technical set-up is encouraging enough right here for current investors to add to their long positions or for newcomers to start to build one. Within Sanofi’s Big BASE you can see that we’ve identified a “smaller” BASE that goes back to May 2017. Combine these favorable pattern set-ups / technical inputs with improving monthly momentum (see lower panel for the stock’s monthly MACD) and we believe the stock gets through 93 and then works to the old high. We’ll omit a more aggressive target until Sanofi breaks out.
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We’re always on the lookout for a turn/reversal in long-term trends and pair trades. While Health Care broadly consolidates following its bullish breakout and acceleration from its 12-month base, a longer-term leader within the sector is starting to give way to a persistent laggard. Since the start of ’14, the S&P 1500 Managed Health Care industry has risen by 253%, while the long-suffering Drug Distributors have posted a decline of 6%, but as the chart below highlights, the relative leadership of the former is starting to give way to the latter. Make no mistake, these longer-term trends take time to reverse, but the breakout from the descending channel for the first time in 6-years definitely caught our attention. While still early, the action at the individual stock level is suggestive that this reversal is gaining traction broadly.
After multiple attempts over the past year, Health Care has finally been able to accelerate through stiff resistance, as longer-term laggards Biotech and Providers & Services (Managed Care in particular), exhibited impressive reversals. Catching many offsides, ourselves included, we would expect a period of digestion as deeply overbought conditions meet resistance. Can momentum persist? As always, how they handle this overhead supply will be particularly telling. While the turn in Managed Care was violent as political concerns eased, the turn in Distributors has been more measured, but nonetheless compelling. We’ve discussed the improving action in CAH, MCK AND ABC before, but we remain intrigued with their potential following 4-year downtrends.
While having a growth bias has been more than beneficial for most sectors, it has been a persistent headwind for Health Care investors since last summer. Biotech, growth’s biggest weighing, is the key driver behind this underperformance and one look at the charts of IBB or XBI and it’s a fair bet that this sluggish price action will carry on. Amgen has exhibited signs of life, but we’d be very careful with Biogen, as the stock looks to be tracing out a meaningful top. On the other hand, Value’s biggest overweight is pharma and while we can debate the merits of individual charts within (i.e. JNJ, PFE), following a sustained period of underperformance the aggregate group looks to be turning versus the broader sector with Merck and Zoetis two of our favorites.
Attempting to call the bottom in a financial asset that is under considerable pressure is always a tricky and dangerous proposition. As you enter the initial oversold stage, the first reaction for many is to immediately step in with buy orders, viewing it as a long-awaited opportunity. While this is usually the right strategy when you have a bullish uptrend at your back, it becomes a bit more treacherous when it’s undergoing distribution. Case in point – the Health Care sector, in particular the Managed Care stocks. We discussed their worrisome price action a few weeks back (A Former Darling Treads on Thin Ice), and regardless of what is behind this move, the oversold condition of today is vastly different from those that had developed back in January and December of last year. The prior two still had a supportive trend, while today’s is occurring in what looks to be a meaningful top. Sure - the violent sell off will likely be met with sharp mean reverting moves, but given the deterioration, and until trend and momentum indicators improve, I’m inclined to lighten up into strength as opposed to viewing weakness as an opportunity increase exposure.
Despite the broader market’s unrelenting climb since the start of the year, Health Care has struggled to keep pace - giving back roughly half of the outperformance that the sector generated in the back half of last year. Biotech is part of it, but it is the sharp deterioration in trend for the Managed Care companies that had me on edge. Strong leadership for years, investors have a ton of unrealized profits imbedded in these names - if the bulls can’t stem the recent decline and hold support, the unwind could get ugly. I’ll be keeping a close eye on the bellwether of the group, UNH and the growing importance of its crucial support in the low $230s.
Like almost everything else in this market, the start of the year has helped to normalize the pain experienced by most of the charts in December, with indices, sectors and stocks all reverting right back into heavy resistance zones. Health Care has had strong leadership, but the sector has given back a decent chunk of its outperformance over the past month as investors rotated to the beaten up, more cyclical segments of the market. This has pushed the sector’s relative performance down into a solid support level, and if my broader concerns about risk assets come to fruition, I would expect relative performance to regain its mojo. Equipment & Supplies, Life Sciences & Tools and Providers & Services (ex-Distributors) remain leadership but selectivity is key when flipping through the charts of pharmaceuticals or biotech. Among the many trends that have broken and bounced right back to the scene of the crime is that of style. Growth has regained half of what it lost to value, and with the former largely influenced by biotech and the latter pharma, the call on style comes down to a bet on these two groups.
The heightened volatility of the past few weeks has only reinforced the leadership relative trends that have been percolating beneath the surface for months. Pharma, Providers & Services and Equipment & Supplies have done an admirable job maintaining their momentum despite the market’s growing risk aversion. The same cannot be said of biotech, as the cracks discussed over the summer have resolved themselves sharply to the downside. This correction has provided investors with a deeply oversold condition at multi-year support, which when combined with favorable seasonality and the thick of earnings season, should provide the impetus for some much-needed relief. I view this reversal in sentiment as a buying opportunity, but the longer that upward price momentum fails to develop, one must start questioning whether the best days for the group are a thing of the past.
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