2 Ways To Trade This Week's Healthcare Earnings

A deluge of earnings reports will come through this week, with major names in the tech, consumer discretionary and industrial sectors taking the stage. But one sector traders shouldn't sleep on is Healthcare. The third-largest sector weight in the S&P 500, behind technology and financial services, has outperformed the index by 7 percent year-to-date. Major names like Amgen, Inc. AMGN, Biogen Inc BIIB, and Eli Lilly and Co LLY report on Tuesday, and that's just the beginning.

This could spell short-term opportunity with the Direxion Daily Healthcare Bull 3X Shares CURE. For the bearish, CURE has an inverse counterpart with an equally memorable ticker, the Direxion Daily Healthcare Bear 3X Shares SICK. CURE attempts to deliver triple the daily returns of the Health Care Select Sector Index while SICK looks to deliver triple the daily inverse returns of that benchmark.

Although healthcare has been one of the best-performing sectors in the S&P 500 this year, traders should treat CURE and SICK as they would any leveraged ETF. That means these are best used as intraday trades, not long-term investments.

Eyeing Earnings

Earnings announcements often represent an ideal avenue for embracing leveraged ETFs and that is certainly true of healthcare funds, though second-quarter expectations for the sector are relatively subdued.

“In the last quarter, 83 percent of healthcare companies in the S&P 500 reported earnings above analyst estimates, according to FactSet, and 73 percent reported revenue above estimates,” according to TD Ameritrade Chief Market Strategist JJ Kinahan. “Granted, the bar was pretty low with earnings only expected to grow 0.5 percent year-over-year in the first quarter. For the full year, FactSet estimates project healthcare earnings to grow 4.6 percent year-over-year, compared to 9.8 percent earnings growth for the S&P 500.”

The index CURE and SICK track is heavily allocated to blue-chip pharmaceuticals names. Alone, Dow component Johnson & Johnson JNJ is almost 12 percent of that index. Although that stock and other such as Pfizer Inc. PFE are not known for excitement, the weights these stocks command in the Health Care Select Sector Index could equal earnings day catalysts for CURE or SICK. AbbVie Inc ABBV, Celgene Corporation CELG and Gilead Sciences, Inc. GILD also all report this week, and make up over 9 percent of the idnex.

Johnson & Johnson earnings "are expected to increase 2.9 percent to $1.79 per share, according to third-party analyst estimates,” Kinahan noted.

Other Opportunities

While earnings season is an ideal time to consider leveraged ETFs, the healthcare sector can be a gift that keeps on giving for sophisticated traders that understand the risks associated with leveraged ETFs like CURE and SICK.

For example, Senate Republicans are moving forward with efforts to repeal the Affordable Care Act (ACA). However, those efforts are far from guaranteed to bear fruit and are likely to meet heavy scrutiny at every turn. The intersection of the healthcare sector and Capitol Hill could favor SICK.

Recently, traders have been pulling money from CURE while flows in and out of SICK have been flat, according to Direixon data.

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