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A Better Day for (Investing in) Health Care

Kaeppel's Corner: A Better Day for (Investing in) Health Care (Stocks)

Jay Kaeppel, Optionetics.com
April 5, 2011

Health care remains a very “hot” topic these days. The passage of Obamacare over a year ago was supposed to “settle” things. But if anything the opposition to this rather lengthy piece of legislation seems to have grown louder. Having not read the 2,700 page bill in its entirety I cannot intelligently comment on its contents (which ironically, puts me in the same category as the legislators who actually voted it into law). But as I understand it in a nutshell, the good news is that we now have the “right” to purchase health insurance. The bad news apparently is that we will also “have the obligation” to “exercise that right” or we will be “fined” by the IRS. On the flip side I also have hear some talk that they are handing out these thing called “waivers” like candy, which allows the bearer to exempt themselves from having to “exercise said rights”. Wow, politics sure is complicated.

Fortunately for me I don’t obsess a whole lot over politics and legislation and so forth. Which is a good thing because my blood pressure pills simply aren’t that strong. Also, it is not yet entirely clear if a person having a heart attack triggered by concerns about Obamacare is actually covered by Obamacare. So I’d better play it safe. At least until my own personal waiver arrives in the mail. In any event, I primarily try to ignore politics and focus on the effects in the stock market. Yes I know it is more and more unfashionable to be a greedy capitalist pig these days. All I can say is that “I’m an old dog and these are new tricks”, if you get my drift. Interestingly (at least to me) is the fact than many markets – including the stock market - and many market sectors tend to fluctuate on a somewhat seasonal basis. So let’s take a look at some interesting seasonal trends in the health care sector.

Best Days of the Month

There appear to be two distinct “favorable times of month” for health care stocks.

1. Period 1: the last four trading days of the month and the first two trading days of the next month (i.e., one contiguous six day period)

2. Period 2: Trading Days of the month number 9 through 12 (i.e., one contiguous four day period)

Please note that we are talking “trading days” and not “calendar days”. So for example, during April 2011, April 1 and April 4 are trading days number 1 and 2. April 13, 14, 15 and 18 represent trading days number 9 through 12. And April 26, 27, 28 and 29 represent the last four trading days of the month.

For our test we will use Fidelity Select Health Care sector fund (ticker FSPHX). It should be noted however, that because of Fidelity’s switching restriction this strategy cannot be used with this particular fund. A list of possible alternatives appears later.

Figure 1 displays the growth of $1,000 invested in FSPHX only during the last four and first two trading days of every month since January 1989.

Figure 1 - $1,000 in health care stocks during favorable end-of-month period (1989-2011)

Figure 2 displays the growth of $1,000 invested in FSPHX only during Trading Days 9 through 12 for each month since January 1989.

Figure 2 - $1,000 in health care stocks during favorable mid-month period (1989-2011)

Just to complete the picture, Figure 3 displays the growth of $1,000 invested in FSPHX only during all “non favorable” days for each month since January 1989.

Figure 3 - $1,000 in health care stocks during all non-favorable days of the month (1989-2011)

For the record, buying and holding only during all non favorable days would have resulted in a loss of -53% over the past 21 years.

Putting It All Together

Now let’s make something of a “system” out of all of this. For our test we will hold FSPHX only during the 9 “favorable days” each and will assume that during all other days we are in cash earning a nominal rate of interest of 1% per year.

Figure 4 displays the growth of $1,000 using this strategy since January 1989. For comparison sake figure 3 also displays the growth of $1,000 invested in FSPHX in January 1989 and left there on a buy and hold basis.

Figure 4 - $1,000 in health care stocks using seasonal “system” (blue line) versus buy and hold (red line).

For the record:

- $1,000 invested in FSPHX on a buy-and-hold basis grew to $6,956 (or +596%)

- $1,000 invested only on favorable trading days grew to $16,609 (or +1,561%)

As I mentioned earlier due to switching restriction FSPHX is not one of the actual trading choices for someone wishing to use this system. There are two alternatives that investors can trade instead in the realm of ETFs:

-iShares Dow Jones Health Care ETFs (ticker IYH)

-SPDR Health Care ETF (ticker XLV)

For example, you could buy IYH or XLV at the close of trading five trading days before the end of the month. You would then sell it at the close six trading days later. Next, buy again at the close of trading day number 8 each month and sell at the close four days later. Repeat.

Summary

As you can see in Figure 4, during the great bull market of the 1990’s the buy-and-hold approach actually outperformed this system. Since then the system has performed far better than buy-and-hold. So what does the future hold? Will Obamacare ultimately have an overtly positive or negative effect on health care stocks? Will the trading days of the month that we have designated as “favorable” continue to be favorable? And most importantly, when will my own personal waiver arrive in the mail?

As always, time will tell.

Jay Kaeppel
Staff Writer and Author of “Seasonal Stock Market Trends”

Optionetics.com ~ You’re Options Education Site

NOTES:

Interested in covered call writing? Log onto www.MoneySteps.com for a free trial. Course videos by Tom Gentile and Monday/Wednesday/Thursday Case Study updates by Jay Kaeppel.