In 2015 the energy sector, measured by the S&P Energy Select etf (XLE) was the worst performing group, down 22%. In 2016, the XLE is the best performing group, up nearly 20%. As we barrel into year end, with the S&P 500 (SPX) up 4% on the year, and just 3% from the all time highs made in July, investors might start to consider what beaten down sector in 2016 might be the top dog in 2017. Healthcare stocks are pulling up the rear:
So far in 2016, the XLV, the Healthcare Select etf is down nearly 3.5%, but 3 of the top 4 holdings, JNJ, MRK & UNH make up nearly 25% of the etf’s weight are all up at least 15% in 2016, masking a lot of poor performance. Digging a bit deeper in the sector and you see that it is a near bloodbath in the Nasdaq Biotech etf, the IBB, which is down 20% year to date, and 33% from its all time highs made in July 2015. The recent rejection at technical resistance at $300, and the etf’s subsequent 10% bloodletting since late last month makes a re-test of the triple bottom low at $240 very much in play:
Oh and you better be right if you are looking to pick a bottom in a sector like Biotech when you consider the massive out-performance vs the broad market since the financial crisis lows in 2009, at one point up nearly 600%, now up 350% vs the SPX up 220%. Another break of the long term uptrend (briefly broke in February) and $200 could be int he cards, marking a 50% retracement from the highs:
Aside from the technical and relative performance mumbo jumbo, there are some fairly clear headwinds for the sector. The election cycle has caused unusually loud rhetoric around drug pricing, and an increasingly likely Clinton presidential win will not cause this to abate anytime soon. Aside from that, a rate tightening stance by the Fed might also cause investors to rethink how they allocate capital to money losing biotech firms who may face pricing caps if they finally create a blockbuster. Oh and the fallout from the Theranos disaster will likely have broad reaching implications for new investment in the space in the near term.
If you had positioned for a bounce in the XLE on Dec 31st 2015, you had an uncomfortable start to the year, as the etf declined 17% in the first three weeks of January, but since then it has rallied 40%. Its important to note that much like Biotech stocks in Q4’15 and Q1’16 it was hard to conjure a fundamental reason to own them. One reason we prefer defined risk strategies when it comes to contrarian plays. We will set an alert in the IBB for $245 to wake us up.