U.S. health stocks diagnosis: Watch the 40-week moving average

What are we looking at?

Attractive U.S. health care stocks.

The screen

We limited our pool to the S&P 100 index.

We looked at each stock's 40-week moving average (40wMA). This is the average closing price over a period of 40 weeks. Charting the moving average week by week gives us a sense of investors' behaviour. Are they growing more (or less) enthusiastic about the company's outlook and are they more (or less) likely to purchase the stock? Generally speaking, stocks that trade above their rising 40wMAs are the best candidates for investments; they are the ones that show bullish investor behaviour.

We chose this indicator because stocks tend to stay relatively close to their 40wMA. When a stock rises far above this average, investors often use this as an opportunity for profit taking, since this usually leads to a price correction toward the 40wMA. When a stock declines far below this average, it suggests an oversold condition and investors can usually expect a recovery rally to follow toward the average, which also provides a selling opportunity.

In the adjoining table, we list the U.S. health care stocks and the level of each stock's 40wMA.

More about Phases & Cycles

Phases & Cycles Inc. has been providing independent research for more than 24 years, using behaviour analysis. We publish investment ideas for both the Canadian and U.S. equity markets. Our research reaches more than 1,000 users across North America and Europe.

What did we find?

There are 12 health care stocks within the S&P 100 index and eight are currently trading above their rising 40wMAs. Among the ones that are closest to this average and show other positive characteristics are Abbott Laboratories, Amgen and Eli Lilly. These must remain above their respective 40wMAs to remain positive.

The most extended stocks – the ones that are significantly above their 40wMA – are Biogen, Bristol-Myers and UnitedHealth Group. These stocks will require a considerable price correction before they become better candidates for investment.

The three stocks that show negative "per cent to average" (trading below their 40wMA) are not attractive candidates for investment at this time.

Readers should consult a professional before making investment decisions.

Ron Meisels is the director of research and Monica Rizk is the senior technical analyst for Phases & Cycles Inc. (www.phases-cycles.com). They may hold shares in companies profiled.