A Shift From Healthcare to Discretionary

• Posted by Greg Harmon
• on December 16th, 2014

Time to take notice. After falling for nearly a year, the ratio of the Consumer Discretionary ETF to the Healthcare ETF may be bottoming. Healthcare has been a hot trade. Everything from the mega-cap entrenched companies to the biotech startups has been on fire. This is revelation should not be interpreted that the run in Healthcare ($XLV) is over. It might be or it might not. But compared to the Consumer Discretionary ($XLY) sector it is about to take a back seat.

The chart above shows the ratio of the two sector index ETFs along with some simple moving averages (SMAs). Not that the trend has been lower since the ratio broke below the 200 day SMA (green line) and has stayed below the 50 day SMA (purple line) ever since, with a couple of brief touches at the 100 day SMA (brick red line) over the summer.

It is still below the 50 day SMA, but since October 23rd, the ratio has been consolidating in a range, printing a double bottom. And as it is testing the 50 day SMA, the momentum indicators RSI and MACD are diverging from price. They are pointing higher. Watch for a move in the ratio over that 50 day SMA or more conservatively, over the 100 day SMA, to confirm a reversal higher.

From there, it is time to start to buy Consumer Discretionary names. The top 5 holdings (about 29%) in the Index ETF are Comcast $CMCSA, $Walt Disney, $DIS, Home Depot, $HD, Amazon.com, $AMZN, and McDonalds, $MCD. Several of these have already had a great 2014 and are in uptrends, making it easier to own them.

Also keep a closer eye on the Healthcare names. They may continue to rise, just slower that Discretionary, but if they do reverse the top 5 holdings in the Healthcare ETF are Johnson & Johnson, $JNJ, Pfizer, $PFE, Merck, $MRK, Gilead, $GILD and Amgen, $AMGN.

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