Sanders Ascension Taking a Toll on Health Care Stocks

The SPDR Select Sector Health Care ETF (XLV) sold off more than 3% in sympathy with broad benchmarks in Monday's session, but it's likely that Bernie Sanders' ascension to Democratic front-runner contributed to the decline. The candidate has called for a dismantling of America's private health care system, replaced by a government-run Medicare-for-All. Pundits don't believe that this legislation would pass congressional muster, but we've learned in the past four years to expect the unexpected from Washington D.C.

The health care sector has been under fire since the election of Barrack Obama in 2008, with the original legislative debate going through all sorts of gyrations intended to wrest power from the industry. The Affordable Care Act, also known as Obamacare, rose from the ashes of that dispute, but the current front-runner for the Democratic nomination wants to throw out what remains of the now-popular law and take sick Americans on a journey into unknown territory.

Health care providers have come under periodic fire in the last decade, but their stocks have shaken off those headwinds, booking healthy profits under the new law. However, key players that include Dow component UnitedHealth Group Incorporated (UNH) have walked away from the program, instead focusing their efforts on more profitable employer and group health care plans. High-deductible coverage options have exploded all across the industry during the same period, infuriating policyholders while making a government-run solution seem more palatable.

The SPDR Select Sector Health Care ETF tested the 2001 low at $21.00 in 2009, finding support 63 cents above that level, ahead of a recovery wave that reached the 2008 rally high at $37.89 in 2012. The subsequent breakout attracted intense buying interest, lifting the fund into the mid-$70s in the third quarter of 2015. A modest correction into 2016 ended in the mid-$50s, giving way to a slow-motion uptick that reached new highs in the second half of 2017.

Channeled price action into January 2020 mounted the triple digits at the same time that the stock hit channel resistance, yielding a trading range bounded by support at the 50-day exponential moving average (EMA) and psychological $100 level. The fund sold off to support on Monday and is trading lower by a few cents on Tuesday, waiting for the next large-scale impulse, higher or lower. A breakdown would bring 2019 support in the low $90s into play, while the 200-day EMA in the upper $80s marked a major line in the sand for sector bulls.

UnitedHealth Group hit a seven-year low at $14.51 in the fourth quarter of 2008 and turned higher, completing a round trip into the 2005 rally high in the mid-$60s in 2013. The subsequent breakout gathered momentum into the 2015 high at $125.99, ahead of a one-day correction during the August mini flash crash. The stock rallied to a new high in the second quarter of 2016 and posted steady gains into the December 2018 high at $287.94.

It was a tough year in 2019 for the health care giant, with a multi-wave sell-off finally ending at an 18-month low near $200 in April 2019. A third quarter decline posted a slightly higher low on the first trading day of October, completing a double bottom reversal that set the stage for a sustained uptick into 2018 resistance The stock broke out at year end, lifting into an all-time high at $306.71 last week.

This week's decline has triggered a failed breakout over the 2018 high and psychological $300 level, igniting sell signals that raise the odds for a test at the narrowly aligned February low and 200-day EMA between $265 and $270. Ominously for bulls, the Oct. 15 gap between $220 and $232 remained unfilled and could generate a magnetic target if dip buyers don't show up at short-term support.

The Bottom Line

Health care stocks are retreating in reaction to macro headwinds and the rise of Bernie Sanders in the 2020 presidential race.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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