SPX pullback should prove short-lived;  Healthcare deserves an Overweight

SPX and QQQ look to have begun minor pullbacks with Wednesday’s decline, which happened during a significant week of FOMC meeting, “Magnificent 7” earnings as well as cycle confluence.  However, technically I expect a US Equity pullback to prove short-lived at this time before suggest prices pull instead back to new highs.   Defensive strength has been apparent for the last week, and Healthcare ETF XLV 1.49%  nearly made a new monthly all-time high close as January came to a close.   Minor weakness in Technology and Industrials should be buyable, while Industrials and Healthcare play “catch-up”.  US Dollar and Treasury yields have shown some minor decoupling from SPX in recent weeks, but expect that both should turn back higher into February/March, which will be important to monitor in terms of duration and velocity. Overall, Equities should be entering a choppy period in February, which tends to be seasonally a worse month than Januarys during Election years.  However, as discussed prior, SPX requires a close back under 1/12/24 peaks arguably to have even short-term concern. (SPX-4802.40).  Upside resistance could materialize in the short run at 4937-4995.

Overall, I suspect that this week’s drawdown should prove temporary and prove short-lived.  SPX likely should hold 4800 and turn back higher towards 4950-5000 into mid-February.  Below are some summary comments to blend the short-term with some intermediate-term thoughts as January has come to a close.

1. Technically stock market pullback should prove temporary for now, bottoming 1^st to 2^nd week in February, but a larger decline is possible sometime from March into April/May before an intermediate-term bottom (5-7% in magnitude).
2. I am bullish for 2024, my target is 5175 which (similar to Tom Lee’s thinking) might prove low. My work suggests that Treasury yields likely start a larger period of decline from March into August which should coincide with a more broad-based stock market rally.
3. Technology and Industrials are my two preferred groups to overweight, but Financials and more recently healthcare have begun to come to the rescue, which is a good sign for US Stock indices. as these are 2^nd and 3^rd largest sectors by size within SPX.  Energy is a work in progress, but should bottom sometime in February and turn higher in a seasonally bullish period.
4. Lots of technical warning signs about breadth erosion and Technology carrying most of the load, which are true.  However, there’s no guarantee that Tech needs to decline.  The rest of the market could simply play catchup.
5. Market volatility is happening SPECIFICALLY because the Fed is not on the same page as the Dot plot and there remains inconsistency towards when and how many cuts will appear.
6. Healthcare barely missed logging its best all-time high close in finishing January above December 2021’s close.   This sector has been playing catchup to Financials which is a positive.
7. Small-cap and China rallies have failed thus far- Both of these could work at some point this year but largely should depend on rates turning down more meaningfully.  Evergrande liquidation could kick off others that result in true capitulation and good buying opportunity for China/Hong Kong.
8. Generally it’s tough fading markets that are at new all-time highs (SPX and QQQ) though the broader market is certainly NOT at new all-time highs when one looks at Value Line, Equal-weighted SPX.. etc, so I expect a period of broad-based catch-up might prove to materialize between Spring 2024-Fall 2024.
9. January finished positive in SPX by +1.5%… however, Equal-weighted SPX, DJ Transports, Russell 2k, Mid-cap 400 were all fractionally negative.
10. Emerging markets will be under pressure until US Dollar turns back lower.  At present, I suspect another bounce in both Dollar and rates will get underway and Emerging Markets (EM) will suffer a bit more.  However, India, Lat Am look best.
11. Sentiment did improve meaningfully from October into December but has begun to retract a bit and the combination of this being an “ELECTION YEAR” with no one happy and 2 wars with concerns over the economy, Open border, could keep sentiment muted.  This has little to nothing to do with stock market normally and results in a “Wall of worry” which is normally quite positive for US Stocks.

Nothing has changed with my thesis compared to yesterday.  Unfortunately for the bears, I don’t suspect much will come of any correction at present, and any pullback likely does not undercut former early January highs near 4802, which is an important level from a wave perspective.  If SPX were to break 4800, or QQQ undercuts 388 coinciding with a larger breakdown in Technology (not immediately expected), then this would merit a tactical bearish stance, in my view.

As shown below, SPX has not violated its uptrend from October, nor has it violated the prior swing high from 1/12/24 at 4802.40.  These are two minimum requirements which need to happen before weighing in too negatively on US indices.  Specifically in this daily SPX chart shown below, this move looks to have played out as a three-wave advance from 1/4/24 lows and has begun a fourth wave. If this interpretation is correct, a push back above 4931.09 should happen before 4800 is breached.  Thus, this short-term pullback makes the S&P 500 attractive for short-term traders from a risk/reward standpoint.

Bottom line, while I’ve listed a plethora of possible concerns in recent weeks, at present, declines likely could still prove minor in scope and duration and lead back to highs.  Without any proof of deterioration, it’s hard making the case for a meaningful peak.

S&P 500 Index

Healthcare nearly logged an all-time monthly high close in January 2024;  Additional outperformance looks likely;  Raising to OVERWEIGHT, technically

Despite the late Wednesday (1/31) selloff erasing the chance for Healthcare to log an all-time high close on a monthly basis, this sector is looking more and more positive technically.

While XLV looks better than the Equal-weighted Healthcare ETF RSPH 1.04% , both are attractive and likely to log further gains in 1^st Half 2024, in my opinion.

On an absolute basis, the recent three months of gains have now neared all-time high territory.  Monthly MACD will likely make a bullish crossover in the month of February 2024.  DeMark monthly TD Sequential “countdown 13 exhaustion” signals are now present and could be confirmed next month (Possible confirmation in February of ratio charts of RSPH 1.04%  vs. RSP 0.83% ).

While I likely could switch back to neutral following a run-up into/past the seasonal time of strength for Healthcare, which is June-July, I feel a bullish stance is proper, and Healthcare should be an Overweight.

Health Care Select Sector ETF

Healthcare relatively speaking looks to outperform in 1^st Half 2024

Healthcare has officially broken a one-year downtrend vs. S&P 500 (Both in equal-weighted terms (XLV is even stronger)) and likely should outperform during the 1^st half of 2024.

The monthly chart of Invesco’s Equal-weighted Healthcare ETF (RSPH 1.04% ) vs. Invesco’s Equal-weighted S&P 500 ETF (RSP 0.83% ) could possibly confirm its first monthly TD Sequential “13 Countdown” exhaustion buy signal by the end of February.  (This signal is currently in place, but has not yet been confirmed.)

The monthly support trend of healthcare vs. S&P 500 was broken last year and has not yet been reclaimed.  However, the recent surge in momentum is sufficient to argue that this could likely happen in the weeks to come.

Overall, technically enough proof of Healthcare bottoming, relatively speaking to S&P 500, is now there to suggest an Overweight for Healthcare heading into February.  I expect this might prove to be a 5-7 month period of outperformance for this sector.

My favorite technical Healthcare stocks are UPTICKS names like LLY 3.05%  and ISRG 3.96% , along with other stocks like MRK 1.86% , VRTX 2.08% , BSX 1.31% , REGN -0.65% , UHS, CAH -0.33% , HCA 2.02% , NVO 1.31% , ZTS, UNH and DHR 1.62% .

Invesco’s Equal-weighted Healthcare ETF / Invesco’s Equal-weighted S&P 500 ETF Ratio

Medical Devices looks to be breaking out relatively speaking vs. Biotechnology

IHI 1.98% , the Ishares Medical Devices ETF, has broken out of a triangle pattern vs. Biotechnology, as gauged by IBB 1.38% , the Ishares Biotechnology ETF.

While both sub-sectors likely work in the months to come, I favor Medical devices for outperformance given the recent strength over the last couple weeks.

Daily ratio charts of IHI vs IBB show a breakout this week of the triangle pattern that goes back since last Summer.  My view is that this should drive outperformance in Medical Devices relative to Biotechnology.

Overall, a meaningful drop in interest rates from March into August could help to drive outperformance in the Small-cap areas within Healthcare.  However, at present, IHI 1.98%  looks preferred over XHE, the SPDR Healthcare Equipment ETF, while IBB looks to outperform XBI, the SPDR Series Trust S&P Biotech ETF (largely Small and micro-cap dominated).

Ishares Medical Devices ETF / Ishares Biotechnology ETF Ratio