By Don Johnson

Health care stocks are proving that they’re not recession proof as I and others predicted back in April.

Look at these charts
for 10 prominent health care stocks. Every one of them has declined so
much in recent weeks that in terms of relative strength, compared with
the market, they’re oversold. All are down significantly from their
52-week highs and several are making new lows.

Schering Plough (SGP), Novartis (NVS) and Quest Diagnostics (DGX) are still trading slightly above their April lows.

Mylan Labs (MYL), Wellpoint (WLP), Humana (HUM), United Health Group
(UNH), Aetna (AET), Universal Health (UHS) and LifePoint (LPNT) are all
trading below their April lows, if not at their lows for the year. (FD: I own none of these stocks.)

Now, look at these point and figure charts.
All show bearish price objectives except NVS and DGX. If Novartis and
Quest fall any more, as they probably will, they will soon have bearish
price objectives too. Click on a chart to see a gallery of charts for a
stock.

UnitedHealth (UNH) already has left its bearish price objective of $35 in the dust. It closed today at $20.52.

Why are these stocks falling in anticipation of a recession? In April, I gave some reasons:

Over the last 10 to 15 years, employers have been
shifting healthcare costs to their workers by paying smaller
percentages of their health insurance premiums and raising deductibles
and co-pays on expensive new drugs and some procedures. This is likely
to make hospitals, medical group practices, pharmaceutical companies,
medical supply distributors and alternative healthcare providers much
more vulnerable to a recession than they have been historically.

So when the stock touts recommend health care stocks as defensive plays
in this bear market, be careful. There always will be a few health care
stocks among the market leaders, even in a bear market, but finding
them takes more effort than usual.

Just because a stock is 20% to 30% below its recent highs doesn’t
mean it’s cheap. It means the market thinks the company’s prospects are
souring and that speculators have repriced the stock to match their
current opinions of the stock and the market. Many companies are
expected to report disappointing third-quarter earnings and to lower
their earnings projections. This is why price earnings and PEG ratios
(PE/projected EPS growth rate) are such unreliable valuation tool these
days.

Nobody’s earnings projects are current because there is very little visibility or predicability in this economy and market.