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3 Reasons to Buy Healthcare Stocks in the Current Market Environment
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Tech’s Red Hot Start
Thus far in 2023, the tech sector is the undisputed winner in terms of performance. The Nasdaq 100 ETF ((QQQ - Free Report) ) was up a surprising 20% in the first quarter despite the fact that there was regional banking woes and weakness exhibited in small-cap stocks. Year-to-date, tech stocks such as Super Micro Computer ((SMCI - Free Report) ) and Advanced Micro Devices ((AMD - Free Report) ) are higher by 31.8% and 42.3%, respectively, while chip leader Nvidia ((NVDA - Free Report) ) is higher by a mind-blowing 82.4%.
Image Source: Zacks Investment Research
Too Far, Too Fast
Despite the stellar performance in tech, and specifically chip stocks, there may be better times to jump onboard. While the price trends remain strong and show little signs of slowing, there are a few key reasons investors may want to look beyond tech, including:
Drastically overbought levels in leading stocks: Nvidia, for example, flashed its highest Relative Strength Index (RSI) reading in more than a year. Though overbought can become more overbought, the risk-reward is no longer favorable at the current levels.
Image Source: Zacks Investment Research
Pullbacks in high beta names can be painful: A good way for investors to think about the 50-day moving is by comparing it to a rubber band. When a stock gets too stretched from the 50-day moving average, it tends to revert back by either moving sideways or in some cases snapping back hard. An excellent recent example is high-flying AI stock C3.ai (AI). The stock entered the week 47.7% above its 50-day moving average and is now -9.6% below the moving average at the time of this writing.
Image Source: Zacks Investment Research
High correlations: Birds of a feather tend to flock together. While tech has been the strongest sector, the laws of gravity suggest it will pull back at some point. Having one or two stocks pull back can be manageable but five or more can cause headaches. Since tech stocks are highly correlated, it is best not to be overexposed to them at extended levels.
One area showing relative price strength this week is healthcare. Healthcare-related stocks such as United Healthcare ((UNH - Free Report) ), Merck ((MRK - Free Report) ), Pfizer ((PFE - Free Report) ), and Intuitive Surgical ((ISRG - Free Report) ) stuck out like a sore thumb on Wednesday by gaining more than a percent while the major indices gave up more than a percent. ISRG and others are set up in attractive chart patterns.
Image Source: Zacks Investment Research
Why Healthcare?
Beyond stellar relative price strength, below are 3 reasons why you should consider healthcare stocks in the current market environment:
Defensive in Nature:No matter what is happening in the broader economy, people’s number one priority is their health. The demand for healthcare products is inelastic, meaning regardless of what happens to their income, healthcare is a “staple”.
Financial Health: Unlike C3.ai and many other speculative, “risk-on” companies, large-cap healthcare providers have strong balance sheets chock full of cash.
Growing Demand: The overall population is aging, led by the “baby boomer” generation. As more of the population ages, demand for healthcare products and services will likely increase.
Bottom Line
Healthcare stocks are currently providing investors an attractive way to “counterbalance” a portfolio overexposed to tech. In general, healthcare stocks have lower betas, strong balance sheets, and are defensive in nature. With tech stocks extended and banking stocks vulnerable, healthcare stocks may be an attractive choice for investors.
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3 Reasons to Buy Healthcare Stocks in the Current Market Environment
Tech’s Red Hot Start
Thus far in 2023, the tech sector is the undisputed winner in terms of performance. The Nasdaq 100 ETF ((QQQ - Free Report) ) was up a surprising 20% in the first quarter despite the fact that there was regional banking woes and weakness exhibited in small-cap stocks. Year-to-date, tech stocks such as Super Micro Computer ((SMCI - Free Report) ) and Advanced Micro Devices ((AMD - Free Report) ) are higher by 31.8% and 42.3%, respectively, while chip leader Nvidia ((NVDA - Free Report) ) is higher by a mind-blowing 82.4%.
Image Source: Zacks Investment Research
Too Far, Too Fast
Despite the stellar performance in tech, and specifically chip stocks, there may be better times to jump onboard. While the price trends remain strong and show little signs of slowing, there are a few key reasons investors may want to look beyond tech, including:
Drastically overbought levels in leading stocks: Nvidia, for example, flashed its highest Relative Strength Index (RSI) reading in more than a year. Though overbought can become more overbought, the risk-reward is no longer favorable at the current levels.
Image Source: Zacks Investment Research
Pullbacks in high beta names can be painful: A good way for investors to think about the 50-day moving is by comparing it to a rubber band. When a stock gets too stretched from the 50-day moving average, it tends to revert back by either moving sideways or in some cases snapping back hard. An excellent recent example is high-flying AI stock C3.ai (AI). The stock entered the week 47.7% above its 50-day moving average and is now -9.6% below the moving average at the time of this writing.
Image Source: Zacks Investment Research
High correlations: Birds of a feather tend to flock together. While tech has been the strongest sector, the laws of gravity suggest it will pull back at some point. Having one or two stocks pull back can be manageable but five or more can cause headaches. Since tech stocks are highly correlated, it is best not to be overexposed to them at extended levels.
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Where can investors look outside of tech?
One area showing relative price strength this week is healthcare. Healthcare-related stocks such as United Healthcare ((UNH - Free Report) ), Merck ((MRK - Free Report) ), Pfizer ((PFE - Free Report) ), and Intuitive Surgical ((ISRG - Free Report) ) stuck out like a sore thumb on Wednesday by gaining more than a percent while the major indices gave up more than a percent. ISRG and others are set up in attractive chart patterns.
Image Source: Zacks Investment Research
Why Healthcare?
Beyond stellar relative price strength, below are 3 reasons why you should consider healthcare stocks in the current market environment:
Bottom Line
Healthcare stocks are currently providing investors an attractive way to “counterbalance” a portfolio overexposed to tech. In general, healthcare stocks have lower betas, strong balance sheets, and are defensive in nature. With tech stocks extended and banking stocks vulnerable, healthcare stocks may be an attractive choice for investors.