A Double and a Triple on “Wall Street’s Most Hated”

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

A beep on the EKG for healthcare stocks
How our expert trader took advantage of the risk-off rotation
Not once, but twice…
These tech stocks are falling into the Red Zone
And these underloved names are going green…

The healthcare sector has spent 2025 in critical condition…

Just a few weeks ago, healthcare stocks were right alongside the energy sector as 2025’s biggest losers.

Even worse, they started the year out right. The SPDR Healthcare ETF (XLV) was up 8.5% year to date in February… before flipping to a loss nearing 7% in the first week of August.

Fortunes have turned once again. Now, in what’s shaping up more and more like a risk-off August – the Nasdaq 100 revisited the late-July lows on Wednesday – healthcare names (light blue line below) are the new broad-market leaders:

This is a healthy turnaround, too, with the sector breaking to new three-month highs and testing the mid-May peak as resistance. Better yet, the Relative Strength Index (RSI) shows short-term momentum is still not yet overbought, and climbing. Here’s a look at this daily chart with the RSI in purple shading below:

Healthcare has been bruised and battered this year as the sector leader, UnitedHealth Group (UNH), has taken some serious lumps.

A DOJ investigation into the company’s Medicare practices, the assassination of UnitedHealthcare CEO Brian Thompson, and the first two earnings misses in more than 15 years invited a swift repricing in the stock.

The troubles went well beyond UNH, though. Fears of cutbacks in government spending on Medicare and Medicaid across the board dropped a heavy weight on the healthcare sector’s shoulders.

All these trends led to XLV trading at its lowest relative level against the S&P 500… ever:

When you see major dislocations like this, it’s time to start looking for signs that the trend has gotten out of whack. And we got a big clue in healthcare company earnings… as well as the investor reaction to them:

Insurer Cigna’s (CI) earnings beat on July 31 preceded a 14% run in the stock.
Drugstore chain CVS Health (CVS) beat on earnings and revenue in its July 31 report, and the stock has run up 14% as well.
Just the same with medical center operator HCA Healthcare (HCA), which beat on revenue and earnings and raised its full-year guidance – a winning combination we’ve talked about before – sending the stock up more than 15%.

All this began at the start of August, when we were warning that seasonality trends could smack the benchmarks down.

Then last week, Warren Buffett moved in on UNH, taking advantage of its lowest prices since 2020.

Investors looking for a risk-off, defensive sector in the traditional summer slump found comfort in the Oracle of Omaha’s guidance.

And now, markets are fleeing white-hot tech and AI stocks to pile into the medical space.

All well and good in hindsight.

But who would have had the foresight to buy into healthcare in early August, buried in the world’s biggest pile of bad news?

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One trader was well ahead of this move…

Sometimes it pays to be a contrarian.

You don’t want to be a full-blown contrarian. Trading opposite the crowd every day is a good way to go bust, fast.

But you should show up at a contrarian party every so often. Because you might go home with a major tip.

Master options trader, chartist, and decadeslong market veteran Jeff Clark threw a contrarian party for his Delta Report subscribers over the last week.

And the theme was rotation… starting with healthcare but not stopping there.

It wasn’t enough for Jeff to bet on the broad sector… even as he noted its extreme valuation mismatch against the S&P 500.

Jeff found an even bigger opportunity in Centene (CNC).

Here’s Jeff writing to his subscribers…

“[When] conditions get so oversold and so depressed, all it takes is a little bit of good news, or a little bit of clarity, to send stock prices sharply higher.

CNC, for example, could announce a management change. It could reinstate earnings guidance. It could start buying back its own stock. Really… any sort of positive news, no matter how insignificant, could be the catalyst that starts a rally in the depressed shares.

Look at this technical setup…

CNC is trading historically far below its 50-day moving average line (the solid blue line on the chart). And, all of the various moving averages are spread quite far apart from each other. This is an extremely oversold condition that should limit the downside potential of the stock from here.

Over the past month, while CNC has been declining, the momentum indicators at the bottom of the chart have been rising. This sort of “positive divergence” is often an early warning sign of an impending rally.

Even a modest rally back up to where the stock landed after pulling its earnings guidance in early July would produce a large-percentage gain in the shares.”

This isn’t Jeff’s first rodeo with CNC. He previously recommended a CNC trade that originally went up 100% before falling all the way back down.

Jeff, prudent trader he is, recommended selling half the position at that 100% gain. That’s something Jeff has always done in the eight years I’ve known him and it’s sage guidance for any short-term trade. With the second half producing just a small gain, that first CNC trade averaged out to 6%.

Jeff and his subscribers didn’t have that problem this time:

“Healthcare stocks are surging higher today following reports that Berkshire Hathaway, Appaloosa Capital, and Scion Capital have purchased stakes in UnitedHealth Group (UNH).

The thinking on Wall Street seems to be: If the world’s greatest “value” funds are buying UNH then the rest of the stocks in the sector must be good values too.

We were fortunate to recognize that earlier this week when we bought call options on Centene (CNC).”

But now, he’s warning investors not to join the contrarian party too late:

“After three strong days, the health care stocks are looking a bit stretched. They’re vulnerable to a short-term decline – which I expect will lead to another buying opportunity.

We’ve already taken profits on half of our CNC call option position. And, I do think we’ll see even higher gains on the trade in the weeks to come. But, I am concerned about a pullback in CNC in the short-term – similar to the pullback UnitedHealth Group (UNH) is experiencing today.”

CNC returned 125% in five trading days for Jeff’s subscribers, once again across two half-position sales.

And it wasn’t the only rotation play Jeff cleaned up on…

Recognizing last month that the tides would inevitably turn towards defensive plays, Jeff also recommended a trade in energy utility PG&E (PCG).

Here’s Jeff in his buy alert:

“The technical pattern suggests PCG has bottomed. Take a look…

PCG fell to a new 52-week low last week. But, all the momentum indicators at the bottom of the chart made higher lows. This sort of “positive divergence” is often an early warning sign of an impending rally.

Since then, the stock has climbed back above its 9-day EMA, and has formed a higher low on the chart. This action increases the chances PCG hit bottom last week, and has started a new uptrend.

Given the historically cheap fundamental valuation, and the technical bottoming pattern, this is one of those situations where the downside is quite limited, and the upside potential could be substantial. It’s an ideal setup for a speculative call option purchase.”

This trade, like CNC, was a contrarian move. Jeff was betting that the devastating price action in PCG was overdone this year, and an overreaction as traders speculated on impacts from future California wildfires (PG&E services central and northern California).

These two stocks were some of “Wall Street’s Most Hated”… and that was exactly the reason to look at them.

But most important, it’s not just these zoomed-out factors that make the trade.

It’s recognizing the opportunity from that level, then finding the trade in the chart. That’s how a veteran trader operates… and it’s why his Delta Report subscribers walked away from this setup with another 149% win in four weeks.

August choppiness continues, and these stocks are slipping…

Starting in mid-July, we spilled some ink warning you of the bearish August-September seasonality pattern.

The S&P 500 charting a new high on Aug. 14 appeared to serve us a heaping helping of humble pie. But in a flash, stocks are back down to where they were at the end of July.

To borrow from the immortal bard Yogi Berra, “it ain’t over till it’s over.”

In times like these, I like to dig deep into the market internals to see where the weaknesses lie. And TradeSmith’s software makes that easy as, well… pie.

I just ran a quick screen that shows us which stocks are in the Red Zone – our proprietary measure of poor momentum. Sorting by TradeSmith’s Health indicator, we can see which stocks most recently turned red out of the 115 names spanning the S&P 500, Dow, and Nasdaq 100…

Note that the top three are technology companies – with Jack Henry & Associates (JKHY) occupying the fintech space.

Computing giant IBM (IBM) entered the Red Zone on Aug. 8. It’s been one of the quiet AI plays – with its stock up more than 72% since the start of 2023 and 26.5% over the last year.

Cybersecurity firm Fortinet (FTNT), too, is taking the heat in the risk-off shift.

If you own any of these stocks, they very recently became weak… and a “sell” in our software.

But let’s flip it around and find the most recent Green Zone entries from the same data set. A Green Zone entry is a new buy signal, indicating positive momentum:

All of these stocks entered the Green Zone on Aug. 20 – amid the recent volatility.

And here we don’t see a whole lot of technology at all. T-Mobile (TMUS), carrying one of the best Quantum Scores in our database, just entered the Green Zone and is up more than 34% over the last year.

That, right alongside industrial multinational Honeywell (HON), is probably your closest thing to a “tech” play. But HON has been sideways for the better part of five years and volatile at that… with a Quantum Score leaving much to be desired. So I wouldn’t call that my top play.

Something like medical supplier Cardinal Health (CAH), with a 75 Quantum score, low VQ, and up nearly 42% over the last year is a much more attractive bet.

If defensive stocks like these continue to win out, it would go to show how uneasy investors are feeling these days.

The good news is, there are always stocks turning green, even when other stocks (you may own) turn red. And if you’re bold enough to catch those rotations early – like Jeff Clark did – that’s where the magic happens.

A Double and a Triple on “Wall Street’s Most Hated”