ETF Outlook: Health Care Select Sector SPDR ETF (XLV)

October 08, 2014 — 09:26 am EDT

Written by Marc Chaikin ->

Every week, Marc Chaikin applies his groundbreaking analysis to an ETF or a sector. Today, he looks at Health Care Select Sector SPDR ETF (XLV)

Health Care Select Sector SPDR ETF (XLV) Courtesy of Chaikin Analytics

The Health Care Select Sector SPDR ETF (XLV) has been the leading sector ETF in a stock market which was at new highs just three weeks ago. There has been a precipitous sell-off in the broad stock market with small-cap stocks taking the brunt of the selling pressure up until the last two days. As the selling has spilled over to the large-cap S&P 500 stocks, health care has been a standout. While indiscriminate selling did surface in the biotech area, quality large cap biotech and drug stocks have clearly been resilient.

When a sector like health care and an industry group like biotech, particularly the quality large cap names have been leading the pack, extreme market weakness often represents a buying opportunity. Remember, Warren Buffett’s admonition to be greedy when other people are fearful, i.e. buy quality stocks on weakness.

The Chaikin Power Bar below indicates that 14 stocks in the XLV have a bullish Chaikin Power Gauge rating while only 2 have a bearish rating. This puts the XLV at the top of the 9 Select Sector SPDR ETFs.

The XLV has outperformed the market since late July of 2014 and was given a boost yesterday by Becton Dickenson’s $58, all cash, bid for one of its component stocks, CareFusion (CFN), which has had a bullish Power Gauge rating since early May. This is an ETF which should continue to outperform the market as many of the component stocks in the XLV are beneficiaries of Obama Care.

The Chaikin Portfolio Health Check is an excellent tool to help zero in on the strongest stocks in any ETF, and in the Health Care Select Sector SPDR ETF (XLV) there are a number of bullish rated stocks.

By looking at the individual component stocks through the lens of the 20 factor Chaikin Power Gauge stock rating model, you can easily find the stocks in the XLV ETF with the strongest price potential over the next 3-6 months. These are the stocks to buy on the current market as they are likely to outperform the XLV as well as the overall market.

The Chaikin Power Grid in Portfolio Health Check (see below) maps stocks and industry groups from strong to weak so you can easily determine the best and worst stocks in any ETF. To find the strongest stocks in the XLV, we look to the upper right and lower right quadrants of the Power Grid (stocks with bullish Power Gauge ratings) where we find stocks with the best potential for price gains over the next 3-6 months. There we see stocks like WellPoint (WLP), Cardinal Health (CAH), Mylan Labs (MYL), Gilead Sciences (GILD) and Amgen Corp. (AMGN).

Over time, strong stocks in strong industry groups will outperform the market.

One stock to consider buying on weakness in the Health Care Select Sector SPDR ETF is Celgene (CELG). Celgene is a biopharmaceutical company which develops and market drugs for the treatment of cancer and immunological diseases. CELG is a leader in the important stem cell research area, where many of the next generation of miracle drugs are expected to be discovered.

The stock has been a market leader since mid-June. Thecurrent stock marketdecline gives investors looking for long-term participation in biotech stocks like Celgene the opportunity to buy at a discount from recent highs. CELG peaked at 96.50 just a few days ago and any further weakness below 91 would be an attractive entry point.