Building a Position in IHF

By: Jim Farrish

I have posted several comments on the recent move in the healthcare sector. In the process of doing so several readers have asked similar questions of which the answer to I wanted to share with everyone. The questions were related to buying into iShares Healthcare Providers ETF (NYSE: IHF). As an investor one of the challenges that face us every day is developing a strategy we can implement with confidence. As some who invests both personally and professionally I harp on having a discipline strategy. In fact we have produced a two hour DVD on this topic. So, first let's start with how we got to this point. Each day I scan the indexes looking for trend changes. When I find them they are put on a watch list to track for breakouts based on my strategy. Below is a chart of the Dow Jones Healthcare Providers index. I showed all the markings of how the trend has changed over the last three months.

Using this chart is how I built a position in iShares Healthcare Providers ETF (NYSE: IHF). The decision process takes into account the overall risk of the broad market as well as the sector. Thus, the process of laddering into a position versus buying all at once. This is part of the disciplined strategy you have to determine prior to jumping into a position. The key is to understand two issues prior to buying. First, goal/objective of my portfolio. Second, the goal/objective of the potential position I am taking. This includes evaluation of risk to both relative to the potential reward. Building a disciplined portfolio takes planning if you want to be successful.

The following is how I played this in my portfolio. There are three boxes on the chart and they are explained below.
First, I like healthcare as a defensive play in a bear market cycle. I have been following healthcare and six subsectors for more than 5 months waiting for a reversal in the downtrend line. The reversal started off the November 20th low. The first trendline above (red) was established off this move.
1. The bounce and consolidation was the beginning of finding what I would consider a play point. $31.22. That is the initial high off the bounce (November low). On the retest of the low I was looking to hold above that point. (higher low) beginning of an uptrend. That happened near the $29 mark. Four days later we were testing the breakout point of $31.22. The fifth day we broke above it, but resistance was just overhead at $32.48. I determined at that time because of the conditions of the broad market to use a break above resistance as my entry point initially. That happened and followed through on 12/17. I added ½ a position because I wanted to build a longer term holding and I wasn't convinced we wouldn't test the lows yet again. As you can see we hit resistance at $36.60 and retested the breakout point of $32.50. My stop was $31.15 because I was looking at this as an intermediate term (9-18 months) play.
2. This brings us to point number two. Because we held the breakout point and support at $32.50 I looked for a point to add again to the position. This came on the move above $34.10 (the high from the bounce off support). I added a ¼ of a position at this point. As you can see the uptrend off the test of support is still in play.
3. The next resistance point is $36.60 and a breakthrough that would be my chance to add the final ¼ of the position. That happened on 2/2, so added to the play and I now have a position that was built off laddering in with trend analysis. My stop is still $31.15. My target is $42 and $46 respectively. My average cost per share is $33.95. This accounts for 2.5% of my portfolio. (low risk based on allocation)
The point of this explanation is to show that you can find plays in a crazy market. You have to have a disciplined strategy in order to manage the risk of the market relative to your both your portfolio and the position. This is a simple straight forward strategy and find the simpler I keep it the better and more confident I am of my plays. I am also more patient with allowing them to develop because I understand the goal/objective of both the position and the role it plays in my portfolio. Money management is all about discipline strategies implemented by a disciplined investor.

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