ETF Update: The Debate over Health Care

There is an ongoing and important debate over U.S. Health Care policy.  Many lives are affected.  The cost of a true solution is high.  There is sharp disagreement over who will pay.  At issue is whether we, as a nation, want to assure some basic level of health care to everyone.  If we do, does this assurance extend to all, perhaps even those in the country illegally?

In answering, it is important to realize that we already pay many of these costs.  We do it through expensive, after-the-fact treatment in both emergency rooms and hospitals.

Our new President has a plan, but what priority will it get in the face of the economic crisis?

For investors there is another aspect to this debate.  Which health care companies will benefit from a new health initiative?  What are the real chances of passage.

Each week we use the rankings from our TCA-ETF model to direct our market focus.  Since the model looks both at Trends and Cycles, and includes a touch of Anticipation, it helps us to see developments that we might otherwise miss.  (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

Spotlight on Health Care

We track health care through the iShares Dow Jones U.S. Healthcare Providers Index Fund (IHF).  The fund consists entirely of health providers, with 45% concentration in five companies and about 65% in the top ten.  The P/E ratio is below 13 and the beta about 1.3.

Since last week's report, IHF made a big move in our rankings, from #18 to #5 this week.  We just added the position on December 23rd.  Let us take a look at the price and volume history as shown in the chart below.  There is an encouraging recent rebound, but the sector is still well off of recent trading levels and far from last year's high.

Fundamental Issues in Health Care Stocks

The three most important questions for the stocks of the health care providers are as follows:

1. What is the likely impact of the Obama plan?
2. When will the plan be given serious consideration?
3. What are the chances of passage?

At ElectionStocks.com, our sister site, we are evaluating the impact of the Obama transition.  We have taken a look at the health policy issues.   In one article, we noted the potential cost of including illegal immigrants.  In another, we point out that the entire plan is likely to be delayed.

Don Dion suggests that the stocks in IHF are likely to benefit from the Obama health plan.

Tom Lydon, in a pre-election article, noted that the Obama plan would dramatically increase enrollment.

Our Take

Interpreting the action of these stocks is tricky.  Has the recent bounce reflected the Obama victory?  Or does it show market recognition that any plan is likely to be delayed?

For the long term, we believe that more details of the plan are needed.  Campaign rhetoric will mean little when Congress gets involved.  It is too soon for long-term investors to buy the sector.

For the short term, we are sticking with the TCA model.

Weekly TCA-ETF Rankings

The ratings reflect prices and signals as of Wednesday night, December 24th. In our daily trading program (for accredited and institutional investors) we buy the top eight sectors. In our weekly program for individual investors (free report available upon request) we stick with the top six sectors. There was little change at the top.  We were down about 3% on the week, losing some ground to the S&P 500, down 1.65.

Based upon the current ratings, we continued our bullish stance in the Ticker Sense Blogger Sentiment poll.

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 do not buy a sector that is in the "penalty box." One can think of this as similar to a trading stop. It means that trading in the ETF has violated certain technical criteria. To assist readers in following this, we have added a field showing which sectors are in the penalty box. The overall number of sectors in the penalty box is also an important read on the overall market, influencing our overall posture.

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.

Comments

[buy soma online]

As the past years of Health Care system in our country continuously burning down to a level of being a wealth care system. For a tough time for now regarding our health care policy but what can we do? We don't have the power and all we have to do is to follow. We are just ordinary people and hoping for a better future for our children's health care system.

[oldprof]

Tim -- It is always interesting to see what the model is choosing. While I understand the basic principles, I am sometimes surprised. We should not expect it to choose all leaders. Anyone could get this through a simple relative strength approach.

I look at the results as advice from a wise friend. I try to find interesting themes. Sometimes the choices are more about risk/reward than recent leaders.

your question is excellent, and worthy of a future article.

Thanks,

Jeff

[Tim Plaehn]

Jeff, I am noticing some seriously out-of-favor sectors rising to the top of your ratings: real estate, coal, insurance, alt energy, latin america and china.

Any comments?