Health Care Stocks on a Roll

Health care insurance could become the most frustrating social experiment/experience we face in the coming decades.

The sector’s stocks, however, could become the most profitable investments over the same time.

Fundamental investors are scrambling to tease apart the good and the bad of the Affordable Care Act, attempting to forecast the net effect to the bottom line of health-care companies… and the potential impact to their stock prices.

Yet, as a technician, I look to recent price action in the health-care sector as a sign of even better things to come.

This sector, with the popular health care SPDR ETF (NYSE: XLV) as proxy, has outperformed every other sector in 2013. And that means health-care stocks should be on your radar in 2014 as well.

“Strength begets strength” is what I said just over a month ago, as I shared a chart plotting the relative performance of each sector during the governrnment shutdown. The health-care sector and the consumer-staples sector had outperformed the broad market during this time, prompting me to look closely at the sectors, anticipating continued strength.

Sure enough, the health-care (XLV) and consumer-staples (XLP) sectors have continued to dominate the market’s returnrns over the last five weeks, gaining 5.6% and 4.2% respectively… beating the S&P 500’s returnrn of 3.7%.

Here’s a year-to-date chart, showing health care leading the pack…

See larger image

What’s interesting about the outperformance of the health-care sector this year is that the market is on a tear, up more than 25%.

Typically, the outperformance of health-care stocks has been limited to years in which the general market was weak because the sector is known for being a safety play. Yet, over the past three years, this sector has outperformed the market during strong years too.

This makes me think the health-care sector is in the midst of a secular shift, where investors are increasingly realizing there are market-beating gains to be had in these stocks.

And, as strength begets strength, I’m expecting this sector to also perform strongly in 2014. For as much uncertainty as there is in the Affordable Care Act, one thing is certain: health-care stocks are on a roll and you shouldn’t ignore them!