There's no other way to say this. It's been an awful year for Healthcare investors.
While the benchmark S&P 500 index has risen almost 10% since the start of the year, the Healthcare sector (XLV) is down -6.2%. That's easily the worst performing sector in the entire S&P 500 The logical question investors should be asking themselves now ... Is the bad news priced in or is the industry in secular decline?
President elect Donald Trump didn't exactly help matters this week.
“I’m going to bring down drug prices,” Trump told Time in an interview released yesterday. “I don’t like what has happened with drug prices.” The comments sent Healthcare stocks down as much as -2% on the day. The subsector Biotech (IBB) was down as much a -4% on the day.
is this A Buying opportunity?
We think so. Hedgeye CEO Keith McCullough sent a signal to buy XLV in Real-Time Alerts yesterday. The reason why is partly explained by volatility.
The two key components of an asset's share price volatility that all investors should consider are "realized" and "implied" volatility. To simplify things, here's what that means:
- Realized volatility measures what actually happened in the past over some pre-determined period of time.
- Implied volatility is a calculated by taking an option's price and backing out the share price. Essentially, it shows the market's expectation of future volatility.
These measures are expressed in percentages which basically show an asset's deviation from the mean over the predetermined period of time. As you can see in the Chart of the Day below, the realized volatility of Healthcare stocks over the past 30-days (18.5%) has exceeded implied volatility (13.8%).
In short, investors believe the future will be less volatile for Healthcare stocks. This is also expressed in the difference between implied and realized volatility, also called the "premium." As you can see the implied volatility premium is -27.8%.
Why this matters
Lower volatility is bullish and may be indicative of a bottoming in Healthcare shares. Time will tell, of course.