Healthcare, Housing, Gold and China

Has the healthcare sector gone parabolic? A look at the chart gives the indication it is on it’s way, if not already there. Since the November low the sector has been one of the primary leaders in the broad market S&P 500 index. For those of you who follow my S&P 500 Scatter Graph of leading sectors know that ¬†on April 1st (no fooling) the healthcare ETF (XLV) overtook financials as the leading sector off the November 15th low. After running in the middle of the pack most of the move, the acceleration has benefited patient investors holding the sector.

The primary drivers have been the healthcare providers (IHF) and pharmaceuticals (XPH). The last week Biotech (XBI) has done its fair share to push the broader sector higher. The clear benefactor of the new healthcare affordability act, the stocks, not so much the general population. In fact, the average person has seen their premiums continue to increase at faster rates than before and that trend will continue at least through 2014 calendar year as the bill is completely phased into effect. That leads me to my first rule of investing, if you find yourself complaining about the price of something… buy the stock. After all, it may be the only way you will be able to afford healthcare. Watch the downside risk as the¬†acceleration¬†to the upside may decide to take a break at the least expected point. Let the profits run as long as they want to.

The housing sector has been a beloved sector most of the last eighteen months. Since late February the sector has grown in volatility along with negative analyst comments on the future growth of the sector. XHB, the ETF for the homebuilders has gained 85% over the last twelve months and that seems to be the reason for the worry looking forward. However, the current P/E ratio of XHB is 21 time 2013 earnings projections. To me that would be fairly priced and on the high side. In fact, the sector is trading at 15 time 2015 earnings projections. Still fairly well priced. Thus, you go with the trend, but breaking down the sector and looking at the fundamental data you can start to understand some of the volatility. After all, at some point interest rates will rise and that could slow the rate of building and purchases. This is becoming a stock picking sector, which means to dig into the stocks and find the opportunities versus owning the whole.

Another component of the market that is causing some stir is gold. Unlike healthcare and housing, gold is sitting near a key support level after falling 12.7% since the high in October. Obviously we are talking about a commodity versus a stock and there is no fair way to compare the two assets, so lets just talk about what really drives the price of gold. First, the logical pressure comes from supply and demand. Second, and maybe a bigger influence at times, speculation driven by fear, greed and manipulation (otherwise know as inflation). That said, gold is currently at $1564 and flirting with the support of $1530-1535. The short term downtrend off the high in October remains very much in play, and there in no threat on the upside. Since we can’t measure any real fundamental data here, we will go with the¬†technical¬†outlook that says sell and run away… Or be short the metal. The other influence is to look at the sentiment or belief in gold currently. That isn’t very attractive either. One conspiracy thought is the price is being manipulated lower. After all, what is taking place in Europe should have the price of gold on the rise. That remains something to watch going forward. Since we are short gold we will stay short, but we have tightened our stops in the event current levels turn into the low and support holds. However, if support gives way $1420 becomes a very realistic opportunity on the downside and we would be willing to add to our existing downside plays. Be patient and let this play out short term.

Another downside component of the market currently is China. Like gold it is a hard thing to get your arms around from a realistic understanding of any fundamental data. There is also plenty of emotion involved in the fact that investors want to believe the upside growth in China is going to return soon. It is an interesting correlation between the two investments, and both have fallen from grace over the last few months. China rallied back from last summers selling to gain nearly 30% from September through January. It has now retraced 60% of that move and FXI is sitting on support at the $35.50 level. Is the selling done? Are the improving economic reports coming out of China believable? There is the argument that some ETFs of Chinese stocks are now in the single digits, making them look cheap, but there is still the uncertainty of growth going forward. This is another opportunity that will develop and become clear in time. For now it goes on the watch list. Hold support and bounce, FXI become a opportunity  Break support, and FXP is the opportunity. Either way, be disciplined and have a predefined strategy of how to take advantage of the opportunity that plays out.

The bottom line with all four of these investment sectors, commodities and countries is to remember, It doesn’t matter if an investment is going up or going down, it only matters which side of the trade you are on.