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What Investors Need to Know About the Health-Care Sector


This group is diverse, but the market could throw it out as a leader.

Editor's Note: Reid Holloway is a consultant who created The RLH Volatility Model.

Every crowd has its cool people, and markets are no different.

The bull market of the early 1960s (then beyond, as that market turned decidedly less bullish and ended up a "net nuthin'" 1966-1982) was called a market of "go-go stocks," and the names included Xerox (XRX), Eastman Kodak (EK), and International Business Machines (IBM). These were also called the "glamour issues" (today we'd just say "sexy" with no inhibitions). There was a list called the "Nifty Fifty," with all the above names and others thought to be blue-chip, large-cap, and suitable for institutional ownership.

On the wilder, more speculative front (read: the individual retail odd-lotter stuff of the day), it was also said that any stock name ending with "-onics" was a sure thing. You get the idea if you weren't around then (or at least conscious of market activity during that era); and you're right if you're thinking it sounds a lot like the dot-com bubble. Fortunes were made and lost.

Language clues are important in defining the times. Keep your ears open and alert. Listen to the language around you. In the subculture of stock markets, language can clue you in on what the crowd thinks is hot -- and not.

Health Care Viewed as Today's Leadership

There's no doubt that one hot group today is the health-care sector, but that very broad moniker includes many, many companies comprising a host of wide-ranging sub-segments from drugs to equipment to insurance to hospitals, and enormous capitalization. That is to say, it's such a huge and broad group, it may not mean a damn thing viewed as a group. Then again, think back to the cool people in your high-school senior class, and you might be able to say exactly the same thing.

What the heck am I getting at here? The answer is leadership -- a very interesting philosophical concept. Understanding leadership is very useful in divining markets and market trends, but you have to know how it works.

In a nutty way -- much like Groucho Marx's (no, not Woody Allen's -- look it up) pronouncement that "I don't want to belong to any club that will accept me as a member" -- leadership is defined by the opposite: "followership." A leader's leadership is only as good as the willingness of those around him to conform with and abide by his words and actions. Baby Boomers will recall that leaders who overstayed their hands in continuing to wear tie-dye pants beyond the early 1970s lost their leadership status as that bit of not-so-haute couture fell from fashion.

Markets Can Throw Out Leaders like Yesterday's Garbage

Possibly owing to its fundamentally New York roots, markets do this at light speed: "What have you done for me lately?"

Here's a chart of the current two-year history of the Rydex (RYH), S&P Equal Weight Health Care.

At first glance, it looks as though it's done somewhat the same thing as what the market as a whole has done over the past two years, although it's apparent its recovery since March has been much stronger.

Tracked against major indices, a clearer two-year contextual picture of health-care leadership emerges.

Here you can see the Rydex handily outperforming (in order) the NASDAQ Composite, the Dow Industrials, and the S&P 500 Index.

Now turn your chart microscope from the two-year to the three-month lens.

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No positions in stocks mentioned.

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