It’s crazy to think about. But the right political rhetoric can quickly sink a sector.
That’s what’s happened in recent weeks in the health care sector.
Health care stocks were beaten down recently after political calls for “Medicare for All.” Folks are worried about the future of this major industry. And prices have suffered.
So we have to ask ourselves, is this the end of the health care industry as we know it? Or have investors overreacted… giving us a rare opportunity to buy?
History says the second scenario is far more likely. And we could make double-digits profits by acting now.
Let me explain…
The health care sector had been on the rise. Then the rhetoric kicked in.
Now, the overall market is hitting all-time highs, and health care stocks have lagged. They even fell 7% in just a few days last month.
But history says the recent fall is overdone… and profits are likely from here.
Simply put, the sector recently hit major oversold levels. It moved too far, too fast, based on the relative strength index (RSI).
The RSI is a simple tool. It tells us when investors have gotten ahead of themselves in one direction or another. And when that happens, a reversal is likely.
If a stock falls into oversold territory – below an RSI level of 30 – a rally is likely to ensue. And that’s what just happened in the health care sector.
The recent decline pushed health care stocks into oversold levels. You can see it in the chart below…
This was a major oversold reading. The health care sector didn’t just fall below an RSI of 30… It kissed a level of 25.
That’s a rare event. But going back to 2000, it has actually led to big upside. The table below shows the details…
The health care sector has been an OK performer since 2000… returning around 5% a year. But buying when the sector is beaten down and completely oversold tends to lead to much better gains.
Similar instances led to 5% gains in three months, 7% gains in six months, and an impressive 11% gain over the next year. That’s solid performance and roughly double the typical return for the sector over the same time frame.
Of course, we don’t know if the current political rhetoric will turn into something more. But it certainly won’t do so anytime soon.
That means the recent panic is likely overdone. And health care stocks are a smart bet right now.
One simple way to own the sector is the Health Care Select Sector SPDR Fund (XLV). This fund tracks the overall sector. And importantly, it has already started rising off last month’s lows.
History says those gains should continue. And we could see 11% upside over the next year. It’s an opportunity worth considering now.
Source: Daily Wealth