Health Care Stocks Look Bullish -- Bearish for the Market

Year-to-date, health care stocks have been the big winner. 

Source: Stockcharts.com

The XLV is up 8% (vs. S&P 500) with the next best sector, Consumer Staples, a distant second at +4.9%. 

I must say it is odd to have the S&P 500 up 12% for the year and yet as shown above, the sectors leading the way are all defensive: health care, staples and utilities. Typically these sectors have the best relative performance during down markets, and clearly YTD this market has been anything but down.

In fact, you can easily see this tendency in the chart below.

Source: Stockcharts.com

The upper inset shows the S&P 500 and the lower inset shows the RYH vs. RSP, which is the Guggenheim Equal-Weight Health Care ETF relative to the Guggenheim Equal-Weight S&P 500. I like to use the equal-weight ETFs as they help avoid distortions due to mega-caps.

You'll note that as the RYH outperforms with a rising line in the lower inset, the S&P 500 (upper inset) tends to decline and vice versa, when the S&P 500 rises, health care stocks tend to underperform. And yet we currently have the health care stocks outperforming and the S&P 500 is rising. Hmmm.

The RYH vs. RSP picture looks quite bullish to me, with it recently breaking out of a two year ascending triangle. That said, and assuming health care stocks continue to outperform, I have to think this does not bode well for the stock market. Past history suggests that eventually the market weakens when defensive sectors like health care do well.