I highlight things I see during the week expecting us not to over-react but instead, consider. What I see today is Healthcare (XLV) testing the April low in relation to the broad US market (SPY). May be be nothing, may be something (in the form of a double bottom).
I have held healthcare related items despite the poor performance vs. the broad market because of the sector’s generally less risky cyclical profile. The technicals in the ratio have been bad since August, but I do want to consider the possibility that a double bottom has been struck here.
Taking it a step further, consider our long-term view of XLV/SPY and its previous signaling of bear markets in 2000 and 2008 (red shaded). Other occasions came at or around stock market corrections (yellow shaded). 2015 was an outlier where Healthcare actually led the stock market into a top. I believe politics was somehow involved there as Trump gained momentum and the debate turned squarely on healthcare costs (esp. BioPharma).
But generally speaking, this is a ratio of an economically more stable sector (H/C) vs. the broad market and it far more often than not foretells stock market corrections when it bottoms. The timing can vary by months but if XLV/SPY has made a real double bottom prior to a rally a market risk indicator would be coming back into play.