Health reform has been the big headline for the first year of the Obama Administration. It is a major policy objective for Democrats. It is the hot-button issue for Republicans.
For investors, there are many possible impacts. On today's Meet the Press, Jim Cramer opined that job creation had been stalled because business did not know what to expect about future costs, including health care. Alan Greenspan agreed.
The issue deserves attention. As usual, I are not going to offer an opinion about the merits of the legislation. Instead, I am going to analyze the prospects for passage, the likely outcomes, and what it means for an investor.
As usual, I will include the current ratings from our system.
Background
In our disciplined system, we study sectors continually, looking at
the charts and ratings for hundreds of ETF's. Each week we provide a
list of our top-rated sectors for the next three weeks, along with some
of our current observations. ETF investors can check out the list and
compare our findings with their own conclusions.
In our analysis, we consider Trends, Cycles, and a bit of
Anticipation. While our ratings share characterisitics with momentum and relative strength approaches, there are important differences. Since we apply the model to nearly 300 ETF's, we call it
the TCA-ETF system. (For new readers, there is a more complete
description of our methods at the end of the article. We also have a
free report with more detail on the system and results, available on
request.)
The model provides a nice feel for the overall potential of the
market. It is not the forest and not the individual trees, but something in between. I'll take a look at the macro picture first, and then take a
look at our featured sector of the week.
The Macro View
From an overall market viewpoint, our indicators show continued risk. The key elements are as follows:
- 81% of our ETF's in positive territory ( down from 86% last week). The median strength rating
for the overall list is a plus 19 (down from +23 last week).
A score of "0" implies the average long-term ETF expectancy.
- Our risk evaluation became more negative, with 88% (up from 75%) of
our sectors are in the "penalty
box." This means that they are currently disqualified from the buy
list for technical reasons. You can think of this as a sophisticated
"stop loss" rule, often applied in advance. It also may indicate the
need to take profits in a sector where we have done well, but see
higher risk. See our article here for a further explanation
of this method. We recently implemented some faster filters,
accelerating moves both into and out of the Penalty Box. We are also
changing some rules to cut down the frequency of trading.
- Our index package is positive. For this rating we look at the
ETF's (both long and short) for the S&P 500, the Dow, and the
Nasdaq. You can see these ratings is the results table for this week.
Despite the positive ratings, we note risk in both directions. All of
the index ETF's are in the penalty box.
Highlighting Health Care
Our top-rated health sector is the Health Care SPDR - XLV. The top five holdings constitute 45% of the fund, geared toward major drug companies. The fund website does not seem to provide P/E or beta information. (Readers feel free to provide a pointer that I missed.) While this is not crucial for our system, it is meaningful for investors with a different time frame.
Here is the chart.
It reflects the market viewpoint about big pharma and the health legislation.
Other Experts
Some of our fellow ETF experts have noted the strength in XLV.
Scott Martindale, using a fundamental method, rates XLV at the top of his list. It always gets our attention when a solid quantitative approach (with different methods) highlights one of our choices.
Maoxian has been long since June, a great call.
Our Fundamental Analysis
The health care legislation is one of the most complex issues I have seen in forty years of following the policy-making process. Most of the twists and turns in financial media are off of the mark. Here is a summary of key conclusions and some links.
- Some legislation will pass. It will constitute a minimal winning coalition (described here) that passes a hurdle in the Senate. The key thing to understand is how Congress works to achieve the needed votes.
- Minimal winning coalitions come from tradeoffs. The managers of the legislation negotiate changes that will gain a certain number of votes while losing fewer votes. The average observer hates the result, which is often criticized as "pandering." The critics do not understand the normal legislative process where compromise is achieved. No partisan is ever completely happy with compromise.
- We cover the twists and turns of the health bill on our sister site, ElectionStocks. The "all clear" for big pharma came with a compromise on what they would need to pay. We highlighted a key CNBC video showing the best pharma plays, as well as HMO ideas. It is a good shopping list.
- The jury is still out. The Hill is an excellent source neglected by many pundits. They highlight the current tradeoffs. The issues are whether there is a public option, whether it has a trigger, the CBO scoring of costs, and whether the leadership tries to use the reconciliation process to pass legislation in the Senate with a 50-vote majority instead of 60. It is amazingly complex, as illustrated here.
- Health Reform and Jobs, raised by Cramer, is an interesting observation. It will not affect the health care debate. Democrats and Republicans alike understand that this is the only chance for passage. "Washington" is creating the conflict, but it is the normal policy-making process. The issue will not be subordinated to a generalized concern for immediate resolution. Cramer is correct in the observation that all seek clarification. This will come soon -- one way or the other.
I tried to explain this in an article describing my prognosis for health legislation. It would be a good dissertation topic. In my professor days, I would find the right student to study it. The ironic possibility is that those opposing a public option might have their strongest influence in negotiations about the 60-vote majority, needed for a cloture vote to preclude a filibuster. If they do not negotiate on that basis, there is a threat of using the reconciliation process. This would produce a public option without many provisions that they seek. In my entire forty-year career of observing public policy, I have never seen this situation.
It is one of many cases where I felt I was writing something very unusual and important on the blog, but few agreed about the significance. My explanation should have been better.
Weekly TCA-ETF Rankings
We lost about 1% last week, dropping 0.7% to the S&P 500.
There were a number of mid-week changes, updated through the close of Thursday's trading.
We provide these ratings as information for readers who may
not trade as frequently as we do. Those signing up for our free weekly
email update can also get the entire list.
As noted above, the macro market indicators are in the
penalty box, and most other ETF's are in the penalty box. Based upon the
current model signals (and noting the high risk levels), we have continued our bullish posture in the Ticker Sense Blogger Sentiment poll.
Here are the top sectors from our expanded universe of 280
ETF's. The list also includes the values for the broad market ETF's and
their inverses.
Note for New Readers
Our weekly ETF Update is designed to assist both investors and
traders interested in ETF's and Sector Rotation. Before turning to the
current rankings, let us undertake a review for readers new to this
series.
Our Method. In this past article,
we described our basic methodology and why we believe the rankings are
useful for fundamental traders and technical traders alike. While we
urge readers to check out the entire article, the key point is that
ETF's pose challenges and opportunities different from investment in
individual stocks. The fundamentals may be more difficult to assess.
Even with a good grasp on fundamental trends, there is a lot of
technically-based trading in ETF's. This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves. Here is an article on that point.
The system synopsis.
We look at Trending sectors, Cyclical Sectors, and build in an element
of Anticipation for both entry and exit -- thus the name of the model,
TCA-ETF. While we do not reveal the exact methodology for spotting
trends and cycles, the system is not a "black box." The basic elements
are used by many, and widely reported. We even discuss the need for human analysis as opposed to black box trading.
We report the rankings
each week, now on the weekend with a one-day delay, using the Thursday
output from the model. We monitor and trade this daily, and offer a
free report (request via the email address on the top left of the site)
for those interested in our weekly trading program.
[Long XLV and RMD]
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