Short Medical-Device Plays After Obama's Win

One area of strength that has persisted in the market, at least relatively, has been the health care sector. (We will leave out of that assessment the HMO companies, which have had their own issues for a while.) This sector has been a good place to hide in on the long side, as these companies are more resistant to the economic storm. Yes, people can put off surgeries for new hips and the like, but health care is ultimately not something that can be avoided.

Health care companies have been a growth business for some time and have enjoyed large margins on their products. The simple change of people living longer has led to the need for more medical care. That is both the cause and the effect. Better health care extends lives, and extending lives leads to more care. The medical product companies are some of the largest beneficiaries, as their innovations replace hips and keep hearts beating, among other great things.

A new presidential policy on health care may throw a wrench into the works. This is obviously a great uncertainty, and with the economy in shambles we may have the benefit of this not being at the top of the list just yet. However, fixing health care was a major campaign focus, and with a Democratic majority in Congress and a new president with a liberal voting record, it seems this will be on the agenda. Our theory is this will not be good for those health care companies that have enjoyed strong margins on their products. While business may stay firm from a volume standpoint, there is a strong probability that growth and pricing will be under pressure.

Baxter International (BAX)

Click here for larger image.

The chart at right is just one company we singled out to demonstrate this potential negative for this sector. Baxter International (BAX - commentary - Cramer's Take) has been a strong stock. The stock is basically flat on the year on an absolute return basis, much better than most stocks. However, it is showing the first indications of a major shift in the complexion of the price action -- from one of accumulation to one of distribution.

The stock is trading below its flat 200-day moving average for the first time in more than two years, an indication the uptrend is ending. The low-volume consolidation occurring under the long-term moving average is a consolidation pattern and typically precedes another leg down.

We would look to establish short positions in this stock at current levels or on strength toward $62. A move above $64 would nullify our theory and we would use that as a stop level. As far as downside potential, the $50-to-$52 level is a conservative target.

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Know what you own: Hughes and Maragioglio mention medical devices. Other companies in the industry include Alcon (ACL - commentary - Cramer's Take), Covidien (COV - commentary - Cramer's Take), Stryker (SYK - commentary - Cramer's Take), Becton Dickinson (BDX - commentary - Cramer's Take), Boston Scientific (BSX - commentary - Cramer's Take) and CR Bard (BCR - commentary - Cramer's Take).

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At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.