Glaxo SmithKline, United Healthcare in the Stealth Bull Market
01/09/2018 9:26 am EST
Investors may expect to see a continuation of money flowing into the large pharmaceuticals. GSK and other similar stocks may back and fill over the next few days and weeks, asserts Joe Duarte, MD. He’s traded, analyzed and written about the markets since 1990.
No doubt every year brings surprises to the stock market. And this year is no different. But perhaps what makes my job most enjoyable is where I uncover the surprises. So, as I reviewed my weekly price charts, I noticed something very bullish. Indeed, money seems to be moving aggressively into the big pharmaceutical stocks as the market sorts out what the repeal of the Obamacare insurance mandate means for the sector.
Consider the following. The healthcare sector was transformed during the past eight years. As insurance companies adapted to the changes wrought by the new healthcare laws, the big drug companies lost their pricing power.
Combined with controversial pricing schemes and some big misses on potential blockbusters, the once shining sector bellwethers, especially the familiar to investor pharmaceutical stocks lost their mojo. But as I will describe below, somebody is starting to buy these once forgotten companies, and it looks as if we are witnessing the early stages of what could be a big shift in the healthcare sector.
A reversal of fortunes ahead?
Because healthcare is a vast sector - a tightly woven ecosystem connected by the flow of money from one subsector to the other, it’s important to examine each subsector component in detail.
This week I want to look at two areas in particular. One subsector is what I call the purse holders, the insurance companies, and the other is one I call the solicitors, the pharmaceutical companies.
Think of it like this. Money is the lifeblood of the system and investors who can discern the flow of the money are most likely to place their bets in companies with higher odds of success. In this case, the purse holders have the money, and the solicitors are trying receive money from the purse holders in exchange for goods and services.
First, I want to examine one of last year’s leaders, the biggest purse holder of them all, United Healthcare (UNH), the largest health insurer in the U.S. As the chart clearly shows, UNH shares had a banner year, delivering well over 45% gains for anyone who held the stock since it bottomed in February 2017. Moreover, the stock is again knocking at the door of its December 2017 highs.
But that is where the questions begin as there seems to be some hesitation in the buying crowd for UNH. For one thing, the Accumulation Distribution (ADI) indicator for the stock is flat, even as the On Balance Volume (OBV) indicator is bullish. This is a bit confusing, but a look at the raw volume indicator (colored bars) shows that volume has remained flat as the stock has made new highs recently. This suggests that even though the current buyers are enthusiastic, there aren’t as many of them as there were during previous advances such as we saw in the spring and later in the year in 2017.
The story is strikingly different elsewhere in the sector. As I recently wrote when recommending shares of Glaxo SmithKline (GSK) owning shares of this company seems like a gutsy play. Yet, the chart, a rough mirror image of UNH, suggests that patient contrarian investors may be rewarded in the end. For sure, GSK was savaged over the last six months. Yet, it is suddenly finding its footing as money is flowing into the shares.
Volume doesn’t lie. Compare the ADI and OBV indicators in GSK to those of UNH. What you see is that, even though it may be early in the process, money seems to be moving into GSK with some conviction. This is further illustrated by the raw volume in the stock which was very robust in the first trading week of 2018.
Rough and tumble trading likely
It has been said that the first trading week of the year is a template for the next 12 months. Of course, there are always exceptions to the rules and the so-called Wall Street mantras.
But, if the action in healthcare follows that notion, then investors can expect to see a continuation of money flowing into the large pharmaceutical stocks. No doubt nothing goes up forever, so GSK and other similar stocks may back and fill over the next few days and weeks.
They may even reverse course and once again retest their recent lows. However, if the big pharmaceutical stocks do not make lower lows of any importance over the next few weeks, my bet is that they are not unlikely to be near the top of the leaderboard by the end of 2018.
I have a position in GSK at the moment.