The medical device sector is still reeling from the healthcare
Slapped with a 3% tax increase effective January 2013, many medical
device manufacturers and distributors such as
fear future sales and earnings growth will be limited. These
companies will be impacted by the levy and incur high costs to
obtain regulatory approval on new products.
iShares Dow Jones U.S. Medical Devices Index Fund
is an exchange-traded fund (
) that seeks to replicate the performance of the medical device
Currently, there are 42 medical device manufacturing and
distributing companies held in the fund. Top holdings include
Medtronic at 10.2%,
Thermo Fisher Scientific (
-- 7.3%, and Stryker Corp -- 6.2%.
Technically, IHI seems at an important turning point -- a major
correction could be looming.
On Friday, April 30th, the fund hit a 52-week high of $60.75. It
also encountered long-term historical resistance near this level,
and dropped about $4 this week in conjunction with the overall
The shares have broken the major uptrend line that began in March
2009 when they hit a low of $31.43. IHI has also fallen below its
10-week moving average and is perilously close to falling below its
30-week moving average which currently intersects at 54.21. There
is some support near $51, the intersection of the lower Bollinger
band, but more substantial support is near $47.50 -- a level
approached during the panic decline Thursday.
The indicators are mixed, but have a bearish tinge.
- Since mid-March, MACD has been essentially flat, but now
appears to be on the verge of giving a sell signal. The MACD
histogram has inched into negative territory.
- The relative strength index (
) -- which bottomed in mid-November 2009 -- was in an uptrend
until this past week. This week it plunged and is in near
freefall after having corrected to 53.7.
- P/E ratio of nearly 30. In comparison, the
iShares Dow Jones U.S. Healthcare Sector Index Fund (
, which seeks to replicate the performance of U.S. healthcare
stocks, has a P/E of less than 20.
Given that IHI appears richly valued and technically vulnerable,
I believe the fund could be a great short opportunity.
P.S. For my top individual medical device short candidate, a
stock which has the potential to deliver even larger returns, see
this week's issue of my Double-Digit Trading newsletter.
Disclosure: Melvin Pasternak does not own shares of any security
mentioned in this article.