[THEME MUSIC] Welcome to Trade Ideas. I’m Jake Merl, sitting down with Mark Newton,
president and founder of Newton Advisors. Mark, it’s great to have you back on the show. Thank you, Jake. It’s great to be back. So today, we’re going to be talking about
health care. It’s no secret that this sector has been underperforming
over the past few weeks and months. But recently, it looks like it’s starting
to rebound. So what do you think, Mark? Is it time to start getting involved with
health care? Yeah, I like this sector quite a bit from
a counter trend perspective. As you mentioned, it is a huge underperformer
for the year. It’s the worst performing sector out of all
11 S&P sectors. It’s up only about 2.3% year-to-date versus
an S&P return of about 17 and 1/2%. Its next closest peer, utilities, is up about
9%. So it’s down even more than 700 basis points
under even the next worst performing sector. Recently, you’ve started to show some evidence
of health care bottoming out. And I think that’s what makes it attractive
for me based on really three reasons. One is that technically speaking, you’ve gotten
very oversold. And as of last week, you made the best returns
out of any of the sectors that you’ve seen over the last week. So it was up almost 3% on the week. So as I mentioned, very, very bad performance
on a year-to-date basis. However, the last week has actually been very,
very good. So technically, we started to see a few signs
of that bottoming and moving up to new multi-day highs. That’s a positive. The second is that we’re approaching seasonally
a very strong time for the group. So typically May through July tends to be
a great time for health care. Particularly the month of July has been very
good. It’s up six out of the last seven years. So it makes me think that we’re coming into
seasonally a bullish time, and that’s also a reason to favorite it. The third is from a pre-election standpoint,
with Biden back in the race, a lot of people think that his stance towards health care
is a little less extreme than many that are going towards the single payer model and really
Medicare for All. So from what I’ve read and know from having
heard him speak, I mean, it seems like he’s going to try to amend Obamacare and really
roll with that as opposed to going to single payer. So if anything, that should put less pressure
on the sector if, in fact, he ends up being the candidate for the Democratic ticket. But I think the group in general has just
gotten very hard hit. So a lot of it’s a mean reversion play on
thinking the sector can show above average strength over the next few months. So, Mark, what is it specifically about the
technical setup that has you so interested? I look at a lot of counter trend tools. And so things like the mark exhaustion is
present, very oversold conditions, then moving up to snap back to a new multi-day high after
being very hard hit. So that’s positive. Seeing some crossovers on things like M-A-C-D,
MACD, is also bullish. A lot of that is coupled with just the bullish
seasonal play and also the ongoing bearish sentiment. I think that something continues to have to
be done with regards to drug pricing and just health care, that if Biden is not the candidate,
then the sector could come under potentially further pressure. So what’s your view on the overall market? And how does that affect your thesis on health
care? Well, equities have been pretty resilient. It’s been very difficult to fade the market
of late. We’ve had one of the best quarters we’ve seen
in the last 20 years. April now looks like it’s going to be very
much positive, up over 3%, with just a couple of days left. I don’t think the rest of the year can do
nearly as well as what’s been seen, of course, but there really has been very little evidence
of any technical exhaustion whatsoever. You’ve seen, one by one, these various sectors
in the last few weeks being taken out to the woodshed, be it semiconductors or industrials
or 3M or energy. I do think energy potentially is peaking out,
and crude oil could start to begin a seasonal decline. I think that it’s a must to be a little bit
more selective in what to own in this market. It’s been a lot tougher to make money in the
last month than it has been in the first few months. January, February, March, the market literally
went straight up. Last month was the first month that we saw
some evidence of a little bit of a slowdown, some breadth deterioration. Given health care’s decline, momentum had
waned a bit. And so those are a little bit of a technical
concern, given that markets had gotten near term overbought. But yet, really it’s a must to wait for some
evidence of trends starting to fall by the wayside before you really adopt any sort of
a bearish tone. And I think it makes sense to consider implied
volatility over the next six months. But my thinking is equities can still push
higher, and the S&P can get over 3,000 and hit 3,040 to 3,070 into early September before
you really peak out. So, Mark, are you bullish on health care in
general? Or is there a specific part of health care
you’re most bullish on? Near term, I would favor that the rally in
the health care services stocks can continue. And specifically, the ETF that mirrors that
is the XHS for health care services ETF. It’s trading at around $64. In the last couple days, we’ve seen that break
out above a downtrend. From mid-February, this group had been very
hard hit. And so now we’ve seen a very strong rally
back in the group, and I think that still has some momentum. I would also look at pharmaceutical stocks. And in the event that the market does have
any sort of minor peak in the next month, that group should outperform. Pharma has been a great area to consider,
particularly on pullbacks. The broader technicals and structure are still
very much intact. Biotechnology is a little bit of a different
animal. I think you have to be more selective in things
like the XBI. That’s tougher to be long the group right
now, until we really see more signs of recovery that can repair some of the damage. Medical services, though, is also an area
that I like. ETFs like the IHI have been very good. It’s been a consistent outperformer. But services is really the group that I would
favor near-term. So I’m looking for that rally to continue. I think XHS gets up to right near $70 or so,
so we can see potentially another 5% or 10% in that group over the next few months. And I’d use probably a 5% stop on any pullback
getting down under 61 and 1/2, 62. Below that, I’d probably stop that out. And what would you say is the biggest risk
to this trade? The biggest risk is that as the next couple
months go on, that Biden might do or say something that might affect his chances and his popularity
wanes, and that another front runner emerges from the far extreme in the Democratic ticket
that might be more pro-Medicare for All. I think that could do further damage to the
group. After all, this is just a bounce right now
in XLV and in most of these health care stocks. And we haven’t seen substantial enough rally
to really repair some of the damage that’s been done. So if it proves to be short-lived, then we
could certainly have a retest if the broader market starts to really accelerate to the
downside. I’m thinking that those are the risks. But I’m confident that sentiment right now
is still negative enough that really any pullback would probably be a buying opportunity over
the next three or four months. Mark, that was great. Thanks so much for joining us. Thanks for having me. So Mark is bullish on health care. Specifically, he suggests buying the SPDR
S&P health care services ETF, ticker symbol XHS, at $64, with a stop loss at $61.50 and
a target price of $70 over the next four months. That was Mark Newton, president and founder
of Newton Advisors. And for Real Vision, I’m Jake Merl. [MUSIC PLAYING]