Five areas to overweight into March

Key Takeaways

• Friday’s follow-through exceeded 4365, the 2/14 lows along with trendlines from 2/9, adding to the confidence of markets having achieved a good trading low
• Treasury yields look to be turning back higher, while many of the Commodities that ran-up as geopolitical tension escalated, have now gone into retreat
• Aerospace/Defense, Metals & Mining, Healthcare, Regional Banks, and Semiconductors all look like attractive areas to overweight for outperformance into mid-March

Friday’s follow-through was certainly constructive, breaking trends from 2/9 along with recouping 4365, the 2/14 lows.  I’m inclined to think we’ve seen a good trading low that should help markets extend gains into mid-to-late March.   In the short run, momentum is certainly a bit stretched following a 280-point S&P gain just since late last Thursday evening which took prices initially down near 4100, and they finished up above 4380 on Friday’s close.  An impressive show of near-term momentum, but prices might have to “Back-and-Fill” next week before a larger rally takes hold.  Overall, it’s right to stick with this rally in my view, and simply use pullbacks (if they happen next week) to buy dips, expecting that a larger rally can happen in the month of March. 

Five Areas to Overweight into March  

1) Aerospace & Defense (ITA -0.04% )

This group has understandable appeal given the recent uncertainty surrounding all the Russia/Ukraine Tension.  Most of this part of Industrials has managed to outperform strongly in recent weeks at a time when the Industrials group has underperformed.

Charts of the Ishares US Aerospace & Defense ETF, (ITA -0.04% ) has risen to challenge the area of meaningful resistance stemming back from November 2021 highs.  This base looks quite bullish and is in the process of being exceeded, to end the week of 2/25/22.  Thus, with one day left in the month of February, this might show a breakout on a monthly basis, which has more appeal, than just a one-day move above a certain level.

While the ETF’s exposure to BA -0.39%  has made this a bit choppier in recent months, I would suggest technically taking a close look at GD 0.39% , LMT 0.03% , NOC -0.17%  and RTX 0.18% , which are among the strongest in this space.   Overall, given no evidence of the Russian/Ukraine conflict dying down, owning a group like Aerospace and Defense makes sense during times of conflict.  Daily closes over $108.50 should lead to initial targets up at $120 in short order.

2) Metals and Mining – Breakout of this multi-month base makes XME attractive for further gains in the weeks to come.  This is the SPDR S&P Metals and Mining ETF, which is 85% based on Metals and 15% on oil, gas and consumable fuels exposure as well. 

While the Gold and Silver trade has shown attractive strength in recent weeks on geopolitical tension, the Steel and Aluminum trade has been even stronger.  Stocks within groups like Steel, Coal, Aluminum, and general mining have shown very nice outperformance in recent months.

Stocks like ATI 0.21%  and RS 0.27%  are just exceeding meaningful long-term bases, and along with AA, ARCH, BTU, CMC, are some of the heaviest weightings of the XME.    Given that this nine-month base in XME maintained a very tight structural pattern, breakouts back to new highs over $47.50 last month allowed for some sharp outperformance.

Overall, I expect XME to move to 60, and dips in the weeks ahead should represent attractive dip buying opportunities.

3) Regional Banks look to be the best area within Financials and should be overweighted   Relatively speaking, when examining Financials, the Regional Banks still look to be one of the better ways to position in this group.   Ratio charts of KRE 1.03%  vs KBE 0.75%  (SPDR S&P Regional Banking ETF, vs. SPDR S&P Bank ETF) continue to look quite appealing technically with this ratio having formed a Cup and Handle pattern going back since 2018.

Given that Treasury yields are showing signs of pushing higher despite the geopolitical tension ongoing, a rally in yields up to 2.20-2.25% looks likely in yields into/after the FOMC meeting in March.

Stocks to favor in this group technically include: PBCT, RF, CMA, FITB and TFC along with Northeastern Bank favorites include MTB, and SBNY.

4) Semiconductors look to be the best part of Technology right now, and relative charts of SOXX (IShares Semiconductor ETF) vs. RYT (Invesco Equal-weighted Technology ETF) maintain attractive technical strength going back over the last few years.

While Software declined sharply in January of this year, Semiconductor ETF’s like SOXX successfully held October 2021 lows and have stabilized nicely.

Relative charts of Semiconductors vs the Equal-weighted Technology space show some additional technical positives.  The group maintains an uptrend vs Technology.  Furthermore, the breakout into  October/November last year was only briefly consolidated, but failed to show sufficient weakness to break the ongoing uptrend, and has recently started to stabilize and turn back higher.

Overall, Semi names like AVGO -1.06%  NVDA -0.96% , MU -0.76% , QCOM 0.62%  and AMD 2.24%  are some of the best to own technically.  Meanwhile, others like INTC -0.76%  remain laggards and should be avoided.

5) Healthcare breaking out relatively is a good sign for this group.

Don’t look now, but Healthcare is on the comeback, precisely at a time when most might have expected this to happen, given its defensive properties.  Normally, times of volatility tend to result in outperformance for Healthcare, and this past month, Healthcare turned in the second best performance of any of the major SPX GICS Level 1 groups.

As shown below, the Invesco Equal-weighted Healthcare ETF has just broken out again above an area of trendline resistance going back to Spring of 2020 in relative terms to the SPX.  Thus, while many sectors have faltered since early January, this group has shown better relative strength which has managed to turn up sharply in recent weeks.

Stocks to favor technically include BMY, CERN, ABC, MRK, PFE, LLY, MCK, ABBV, ABT from a trend following basis. Many, when eyeing weekly and/or monthly charts going back 15-20 years are breaking out, or on the verge of long-term breakouts from major bases and are attractive.

From a counter-trend perspective, I like giving MRNA and BIIB a look.  Though these will certainly take time given their steady downtrends lately.