NEW YORK (TheStreet.com) -- Popular sectors, like tech and retail, have run into a buzzsaw of selling pressure because recent economic data is raising doubts about the green shoots theory. Market timers have two logical choices in dealing with this downturn: They can stand firm and hope their positions survive, or pull up stakes and search for new venues where buying interest remains strong.
The most effective plan will utilize elements of both risk management strategies. For starters, it's a good time to close out marginal performers and reduce size in portfolio positions that show the greatest profits. Then use a portion of the freed-up capital and buy into sectors that show increasing relative strength compared to the broad market.
Three specific plays come to mind at this juncture: health care, international exchange-traded funds and the pharmaceuticals. Utilities and traditional defense stocks might also work down the road, but I don't think it time to commit to these recession-oriented sectors just yet, so let's focus our attention on the three rising stars.
The health care sector is a great place to add long-side exposure right now. Many of the reasons for avoiding these stocks are fading from view after a tough summer for the Obama administration. In fact, the odds are now favoring a modest reform plan that does little to undermine industry profits.
I don't believe that bullish outcome is baked into the stock prices of the major health care players yet despite the most recent uptick. That could change after Congress comes back into session next month. For now, let's focus on the strongest technical patterns because these issues should benefit most from the shifting paradigm.
bottomed out at a five-year low at $14.21 in November and started to move higher. It topped out at $35 in February and sold off, after the health care debate started to heat up. The stock then settled into a sideways pattern, with resistance at 28 converging with the 200-day moving average. It nosed above that level in late July and pulled back.
The administration's change of heart last weekend about the controversial "public option" triggered a sharp rally on Monday, pushing the stock above the three-week high and confirming a notable breakout. This positive action sets the stage for a continued uptrend that should eventually reach the February high.
Other health care carriers and providers with bullish looking patterns include:
Coventry Heath Care
United Health Group
Health Management Associates
The fate of the American economy is certainly open to debate but the growth curve in other parts of the world is sitting on much firmer ground. As a result, market timers could find better returns on foreign soil than here at home in the next few months. But this is a stockpicker's market any way you cut it, so choose your foreign ETF exposure wisely.
iShares MSCI Austria Index Fund
sold off from $40 to $9 and bounced in March with other world markets. It reached resistance at the 200-day moving average in June and dropped into a sideways pattern for the next two months. The fund rallied over the June recovery high earlier this month and confirmed new support at the moving average.
This is a top country performer that's now trading at a 10-month high. It ticked lower with other world markets this week but shows absolutely no technical damage, at least so far. If downward pressure continues, look for buyers to reappear between $17 and $18, and trigger the next leg of the fund's persistent uptrend.
Other world funds with a bullish look include:
SPDR Emerging Latin America ETF
iShares MSCI Australia Index Fund
iShares MSCI Pacific Ex-Japan Index Fund
I examined the highest capitalized members of the pharmaceutical sector earlier this month and, frankly, didn't see too much of interest. However, it's a different story for the mid-cap players in this broad group. Perhaps the agility that comes with smaller size has made it easier for these companies to build revenue and watch profit margins.
sports a market cap of just over $8 billion. It bottomed out at an eight-year low in March and started to move higher. The stock hit resistance at the 200-day EMA in June and pulled back. It found support quickly, broke out about four weeks ago and is now trading near a 10-month high.
This week's selloff has had little effect on the stock, which is holding right near the rally high. This resilience predicts the uptrend will continue in the weeks ahead, with the September 2008 gap near $33 marking the logical reward target. Just keep in mind this is a fairly slow mover that will require a patient hand to book profits.
Other mid-cap drug companies hanging tough in this August market include:
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
-- written by Alan Farley in Scottsdale, Ariz.
At the time of publication, Farley was long Health Management Associates, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of
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