Health Care’s 7-Year Warning Signal Just Flashed VIEW IN BROWSER By LUCAS DOWNEY, EDITOR, TRADESMITH’S ALPHA SIGNALS The S&P 500 is finally pulling back. Incredibly, it has dropped below one of the most followed technical benchmarks: the 50-day moving average. You’d have to go back to April to find the large-cap stock index below this line. But today’s signal on health care stocks is exactly the opposite: They’re overbought. From the highs set on Oct. 29, the S&P 500 is down 3.2%. See, much of the risk-off market sentiment has to do with worries of an AI buildout slowdown coming and elevated valuations. So this sour sentiment has seen money flocking to safer, dividend-rich groups. Defensive areas like Health Care, Energy, and Staples have outperformed, gaining 5.29%, 1.98%, and .31% respectively: 
Compare those top performers with more cyclical sectors like Technology, Communications Services, and Discretionary. Under the surface, they’re the main culprits for the latest market setback. Each has fallen 6.77%, 3.83%, and 3.66%, respectively. So, given Health Care’s monster surge, you may feel tempted to buy a bunch and join the party. But that buying frenzy is exactly the problem. Health Care stocks have reached their most overbought reading in seven years! More often than not, a healthy pullback follows. And the performance has been very rough three months later, as you’ll soon see. That said – there is one Health Care stock that defies this pattern completely. After we slice up the historical data on the sector, I’ll fill you in on the elite stock that is still a buy at these levels. That way, you’ll be armed with a game plan for your stock portfolio. Health Care Stocks Are Most Overbought in 7 Years Momentum is a powerful force in investing. A large thrust higher can point you to the winning market leaders. That said, sometimes the rubber band stretches too far, groups of stocks get extended, and are then ripe for a pullback. That’s the case today for the Health Care Select SPDR Fund (XLV) which is home to the world’s top pharma, managed-care, and biotech companies, including Eli Lilly & Co. (LLY), Johnson & Johnson (JNJ) and AbbVie (ABBV). One widely used warning that the price is running too hot comes from the Relative Strength Index (RSI). Developed by mechanical engineer-turned-market technician J. Welles Wilder, this momentum oscillator measures the rate of change in price action. Most often, traders use the previous 14 days of data. And when the RSI reading eclipses the 81 level like the popular SPDR Health Care Select Sector SPDR ETF (XLV) just did, that means it’s gotten way overbought: 
This is a rare reading. In fact, the last time this fund crossed above 81 was in 2018. Here’s why you need to pay attention and sit tight on this group. We went back 20 years and found that XLV has only seen its RSI above 81 just 17 times. This includes 2007, 2011, 2017, 2018, and now 2025. Here’s what happened next using median returns. XLV is typically negative with: - One-week median returns of -.2%
- One-month median returns of -.5%
- Three-month median returns of -4.9%
Notice the low positive hit ratio in all instances. And this weakness typically lasts the whole year: 
Keep in mind that this sector includes companies so strong, they made it to the Dividend Aristocrat rankings… so don’t get too glum. A healthy pullback is a good time to go hunting for value before the price rebounds. Maybe set a target pullback of 4% to 5% over the next month or so, bringing XLV back to $146 levels. Or focus on an elite stock that tends to perform even when overbought. I’m talking about drugmaker Eli Lilly. I first discussed LLY back in early 2024. Founded in 1876, this pharma giant has had tremendous success in the last few years with its weight-loss and diabetes drugs Mounjaro and Zepbound. The $970 billion market cap drug maker saw revenues ramp to $45 billion last year. Analysts see sales climbing to $63.3B this year and $75B in 2026. The net income story is just a powerful with net income set to reach $21.2B in 2025 and $28.2B next year. Using the same framework as before, we can see that LLY has reached an RSI of 83… easily in the red zone: 
Looking back on the last 20 years, I was able to spot 47 instances when LLY sported an RSI of 81 or greater. And while the stock is rather rangebound in the near-term, longer term, this overbought reading has signaled strong gains ahead. Here’s the median forward return for Eli Lilly whenever shares reach an RSI of 81 or more: - Shares are flat a week later at +.2%.
- One month later, LLY jumps 2.3%.
- Three months later, it climbs 3%.
- Six months later, it’s at +15.8%.
- And 12 months later sees a + 17.6% gain.
So unlike the broad Health Care sector, LLY has great three-month upside – and even more six and 12 months later. The bottom line is to focus on high-quality stocks in any market environment… those tend to outperform as they are backed by amazing businesses. And a wonderfully easy way to know that LLY is an amazing business is by glancing at Jason Bodner’s Quantum Score. In one simple grade, we get a clear picture of the company’s fundamentals and technical attributes. That includes data from Jason’s proprietary Big Money Index, showing whether the stock’s in high demand on Wall Street. And in Lilly’s case, it does get a passing grade. A fantastic one, even – 97.7: 
So bottom line, Health Care stocks are overbought. And odds are, most of them won’t stay this way for long. Expect a healthy pullback around the corner. That said, don’t neglect all-star stocks just because a group is overheated. Eli Lilly has been an amazing performer over the long haul, regardless of an elevated RSI. That’s the clear signal my historical data is sending – plus Jason’s Quantum Score confirms that Big Money is in place to keep it that way. As markets enter choppy waters, there’s no better time to be armed with cutting-edge software to help your portfolio navigate them. That’s the healthy wealthy way to invest. Regards, 
Lucas Downey
Editor, TradeSmith’s Alpha Signals (Disclosure: Lucas Downey holds shares of AbbVie (ABBV) as of this writing.) Note from Ashley Cassell, Managing Editor, TradeSmith Daily: Speaking of Big Money – these days, it’s not just Wall Street, is it? It’s Pennsylvania Avenue. As the Trump administration gets together its U.S. Sovereign Wealth Fund, it means our government (the richest entity in history) is charging into the stock market… Sending its chosen stocks soaring hundreds of percentage points. Which stock is next to make the list? Personally, I’m always surprised… But not Rick Rule. He and his colleagues are some of the most connected experts in today’s hottest industry – natural resources. With America going all-in on AI, we either get the resources we need… or the party stops here. That’s what makes this the biggest investing story of our generation. Click here to watch Rick’s free briefing and learn the stock that everyone will wish they owned in six months. In Case You Missed It 
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