In case you missed it, global equities have been volatile over the last month:
- the German Dax trading in 9% range from prior peak to trough last week, and now back within 1.5% from the June high.
- the Shanghai Comp was down 35% from its June high at one point, and is now up 18% from last week’s lows.
- the Nikkei in Japan had a 9% peak to trough decline, but has since rallied about 5% since last Wednesday.
And of course the S&P 500 was down 4% from the all time highs made in May. While the SPX showed some fairly decent relative strength during the selling, it’s important to note the relative out-performance on the year by the DAX, Shanghai and Nikkei prior to the declines. The SPX is up about 1%, vs 16%, 23% and 15% respectively (while all are well off of their prior highs, and the SPX is just a couple % from its). U.S. stocks are playing a good old fashioned game of possum while the rest of the world threatens to lose its mind.
In my mind there are some troubling undercurrents in the U.S. stock market, most notably what I perceive to be a crowding in a small list of well loved stocks (AAPL, DIS, FB, JPM, NKE, SBUX) while there’s a lack of participation of cyclical stocks like Industrials that should benefit if we were in fact in an improving domestic economy.
But I wanted to highlight a specific bright spot in U.S. stocks. Biotech/Pharma investors are showing little inclination to take profits ever over annoying macro issues like Greece or China. The Heathcare Select etf (XLV) is up nearly 11% on the year, and just a couple % from the recent all time highs and is the best performing sector in the S&P500.
The etf has held the uptrend since the start of 2014, and a breakout to new highs could be in the cards.
The 10 year chart of the XLV shows the epic breakout in 2012 after a very long consolidation, with the index doubling since.
The 10 largest holdings make up more than 50% of the weight. Many of these holdings trade at a discount to a market multiple and are stated acquirers of smaller companies, two trends that have buoyed the sector of late:
On a short term basis the XLV could be a decent trade as a long. But longer term, as the M&A cycle slows down, the crowding in this space means gains similar to that of the last few years would prove tough as fear of missing out money exits.
For those looking to pick a direction, XLV options are some of the cheapest on the board, with 30 day at the money implied vol at about 15%:
What’s apparent from the one year chart above is that when XLV does have mini-corrections, vol spikes quickly. In mid December the etf declined 6% from the then all time high as large component GILD got hit on concerns over generic drug pricing, and short dated options prices saw IV double almost instantly across the entire etf.
As volatility in equity markets the world over cools a bit, it could prove to be an opportunity as we head into earnings season. If vol gets hit hard after this Greek deal I’d consider stock replacement strategies and cheap sector etf protection for concentrated holdings in some out performers.