Being an investor implies we like to invest our money versus talk about what is wrong with the current market. So let’s find where we can put money to work versus talking about an aimless Fed or useless White House administration too focused on licking its wounds to focus on the economy.

Each week I do a podcast, Sector Exchange [1], here on greenfaucet.com.... the goal is to break the market into pieces (sectors) in order to see what is moving the market up or down. One of the sectors under discussion the last month was healthcare. The market has turned more defensive in nature and it is only natural for money to rotate somewhere which favors that stance. One of those areas has been healthcare. Going back to my opening statement as investors we want our money to be invested in pieces (sectors) of the market which are moving up, healthcare is one of the ten broad sectors of the S&P 500 and it is currently one of only four which remain positive from a long term perspective.

Short term, it is one of only two that is positive. Taking a quick look at the chart you see we are fighting resistance once again at the 365 mark, yet the index moved up 4.8% last week while the broader index was down. Money is rotating to the defensive sectors and healthcare is one of those benefactors. From a short term outlook the next key move is above the 365 mark. The weekly chart shows the same resistance point to the longer term uptrend. It is important to note a break here would be bullish short term to the outlook.

Healthcare Daily


Breaking the sector down further we see what is moving the broader sector. HMO’s have been the underlying key. After consolidating Feb-Aug 2007 the HMO index broke out and has moved up more than 15% from the buy point in August. The move above the 2060 mark was another buy point for the sector as well. The service providers have been the backbone while the drugs and biotech sectors have struggled to maintain solid uptrends. Until the trend breaks we see no reason to exit this piece of the market and rate it a hold.

HMO Weekly

Meanwhile, the drug and biotech subsectors have been struggling, which is why the broader index has been consolidating in the recent trading range. The key to the sector moving higher will be for one or both of these two components to break out. The drugs are the more likely candidate as they are hitting resistance short term at the 358 mark. A break through the top of the trading range would confirm the recent bullishness in the sector. The weekly chart shows a bounce off the long term trendline as support last week. Fundamentally breaking the sector down we see it has been led by only a few stocks and thus the challenge. We would exercise patience here and let the index move above resistance before taking any new positions. For existing positions we would use the move higher to adjust our stops.

Drugs Daily

ETFs are the simple way to play these sectors. If you are not familiar with this type of investment it would be worth visiting either iShares or PowerShares websites to read up on how they work along with the advantages and disadvantages of each (Editor's note: ETFTrends is another great site [2], and we are proud to have Tom Lydon as a contributor of exclusive content to greenfaucet).

To that end, IYH is the iShare for the healthcare sector and a pure play on the index. For more leverage, ProShares has RXL which is leveraged 200% or two times the index. Make sure you understand leverage prior to investing as risk cuts both ways. PowerShares gives you their version of the index PTH. Evaluate each and use the one which best matches your investment risk and profile. HMO’s are a challenge when it comes to finding an ETF to match the profile. There are several options to play here, but PowerShares offers Healthcare Services (PTJ) and is the best fit we have found for the index. Drugs offer several options such as PPH (HOLDRS) which is the oldest version. A second option, PJP, is the PowerShares version for the index. Both have their advantages and disadvantages. Find the one which best fits your investment profile. The markets have been more defensive as the consumer weakens along with the economy. The challenges in front of the current market environment aren’t going to dissipate anytime soon so it is important as an investor to make sure you are tracking the pieces (sectors) of the market that are moving. Tracking sectors and matching the ETFs to them is a simple way to take control of your money. At SectorExchange.com you can view our sectors at glance page for our current outlook.l

Jim Farrish
www.sectorexchange.com [3]