Health care gets shot in the arm

  • Long-lagging health care stocks have rebounded recently
  • Traders could continue to benefit if a large-scale rotation is under way
  • Certain sector names have exhibited compelling setups

Health care stocks, long on life support (second from the bottom among S&P 500 sectors so far this year), have shown signs of life recently. Last week the sector actually led the S&P—the second time it’s done so in the past month.

Regardless of whether it’s a temporary phenomenon or a sign of genuine longer-term rotation into an arguably oversold sector, there are a few compelling individual stories among these stocks that may attract the momentum crowd.

First up, pharma giant Pfizer (PFE), which began to rally in mid-August after taking an earnings-related hit in late-July. But the stock jumped above its September highs after last week’s earnings release, which included the company raising its full-year guidance1—a reversal of the more pessimistic outlook it offered the quarter before:

Chart 1: Pfizer (PFE), 6/18/19–11/4/19. Pfizer (PFE) price chart. Consolidation after earnings jump.

Source: Power E*TRADE

PFE has spent the past few days in a tight consolidation, setting up a possible breakout situation that may appeal to short-term traders who often look for stocks that are pausing after a high-momentum move, the logic being that the move may resume after the stock “catches its breath.” But even if PFE  continues on its recent upward trajectory, there’s always the chance it could attempt to fake out traders with a quick downside move first.

The chart below shows another pharma mainstay, Eli Lilly (LLY), which recently rebounded off a support level that has been in effect for more than a year. Although its done that a half-dozen times since last November, the latest upswing has a couple of distinguishing characteristics.

First, the stock made a “spike” low on October 23 when it released better-than-expected quarterly numbers—dropping nearly 7% before the previous day’s low (and below the support level), but rallying to close near the top of the day’s range:

Chart 2: Eli Lilly (LLY), 5/1/18–11/4/19. Eli Lilly (LLY) price chart. Rally after spike low

Source: Power E*TRADE

The next day’s low was around 5% above the spike day’s low, and the stock has since rallied an additional 5%. While dramatic spikes like this one sometime accompany notable swing points, what may be even more significant are recent reports that LLY insiders, including its CEO, have been scooping up the stock.2

While company execs buying stock isn’t a guarantee of continued gains, all else being equal, bullish traders prefer to see the inner circle acquiring shares of their company rather than dumping them.

Finally, it wouldn’t be fair to talk about health care without mentioning a biopharma stock. It’s difficult to see in the chart below, but like Pfizer, Incyte (INCY) has been consolidating in recent days after a surging in the aftermath of earnings last week:

Chart 3: Incyte (INCY), 7/10/17–11/4/19. Incyte (INCY) price chart. Ascending ranges

Source: Power E*TRADE

INCY shares are now relatively close to the top of the extended trading range they entered after a January–March upswing that pushed the stock out of an even longer (April–December 2018) range, the top of which has provided support for the current range. Traders may be eyeing, at a minimum, a test of the current range highs if the stock can break out of its short-term consolidation.

Short-term traders should focus on individual setups with the best potential risk-reward characteristics, but it never hurts to have sector strength on your side, especially when that sector may be poised to benefit from a larger rotation within the market.

Market Mover Update: The Dow Jones Industrial Average (DJIA) joined the record-high club yesterday, pushing more than 100 points above its old high of 27,398.68 from July 16. The S&P 500 (SPX) and Nasdaq 100 (NDX) also notched new all-time highs.

Today’s numbers (all times ET): International Trade (8:30 a.m.), PMI Services Index (9:45 a.m.), ISM Non-Manufacturing Index (10 a.m.), JOLTS (10 a.m.).

Today’s earnings include: Allergan (AGN), Amarin (AMRN), BioTelemetry (BEAT), Devon Energy (DVN), Twenty-First Century Fox (FOXA), US Foods (USFD), Newmont Goldcorp (NEM), Match Group (MTCH), LGI Homes (LGIH), Microchip Technology (MCHP), Regeneron Pharmaceuticals (REGN), Nektar Therapeutics (NKTR).


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1 StreetInsider. Pfizer (PFE) Top.coms Q3 EPS by 13c, Raises FY Guidance. 10/29/19.

2 Barron’s. Eli Lilly CEO David Ricks and Other Insiders Are Buying the Slumping Stock. 11/3/19.

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