Technical Strategy Video:
Key Takeaways
- Equity index trends remain largely in consolidation mode and important to hold SPX 4612, QQQ-387.60 to avoid a selloff ahead of the Christmas holiday
- Defensives taking center stage, yet again with groups like Utilities, REITS, Staples leading
- Healthcare remains one bright spot, having broken out of downtrends since September
Nothing has changed with regards to the thesis discussed last week of Equity indices stalling out and potentially reversing back lower. This is widely viewed by most as being lunacy in the month of December, but the specific cycles, Exhaustion indicators, not to mention breadth, and momentum all paint this December as being more akin to 2018 than a traditional seasonally bullish period. At present, little to no real damage has been done to SPX compared to what transpired to broader Equal-weighted indices during late November; However, until Nasdaq and DJIA can push back to new highs with SPX and breadth can improve substantially, it looks more likely that consolidation and weakness is possible in the short run, before any move back to new high territory. Defensive outperformance is often a key “Tell” that this December could bring about a bit more “Holiday Red” than many market participants are expecting.
Specifically, the following technical issues that are worth concentrating on, for those scratching their heads as to why markets aren’t moving higher in December:
First, as discussed frequently in these musings, Equal-weighted Averages for US stocks remain well below all-time highs hit back in November. Many like Value-Line Geometric Average have made little to no net progress in over seven months’ time. While many like to concentrate on SPX as a benchmark to measure returns, the “Uber-Dominance” of FAANG issues within indices & ETF’s often camouflages the true picture of what’s happening with Equities as a whole.
Second, weekly momentum gauges like MACD and RSI show extreme negative divergence, with momentum having largely peaked for the year back in May/June on weekly charts. Subsequent rallies to new highs in Equities were not followed by similar movement in momentum, which actually fell to make consecutive lower highs in August/September as well as November.
Third, the false breakout of half the SPX GICS Level 1 sectors looked far more important technically than what might be seen when purely viewing NDX, or SPX price action. Other sectors like DJ Transportation Avg, or the Russell 2k also peaked out in November and remain well off highs.
Fourth, sentiment did manage to turn negative into early December, but never really generated proper signs of capitulation. The bounce from early December seems to have lifted sentiment to a more Neutral stance, as Equities made sharp gains. Yet, no Equity Put/call ratio readings over 1, and no TRIN (Arms Index readings over 2). Meanwhile VIX backwardation wasn’t a factor and since that time we’ve seen the VIX curve steepen back out meaningfully.
Fifth, cycles of importance based on my composite from Foundation of the Study of Cycles as well as Gann’s Mass Pressure index both showed a rather choppy December which only started to turn higher short-term after Christmas into the New year. Thus, further weakness into/following FOMC would not be a surprise based on what cycles are showing, but could prove beneficial to those looking to buy dips ahead of the final week of the year.
Sixth, we’ve seen High Yield deterioration largely for the first time all year along with some sharp outperformance in Defensive issues. These are tell-tale signs that frequently indicate markets are operating in an environment that’s anything but “Risk-On”, despite no meaningful weakness yet in QQQ or SPX.
QQQ move to new multi-day lows looks to be a decidedly negative finish for Monday
One index which should be given lots of attention, and honestly more attention than SPX, is the NASDAQ 100, shown here in ETF form via QQQ etf. QQQ remains well off its November peaks, despite the recent strength in Semiconductors. However, SOX moving down to multi-day lows was thought to be a negative for QQQ which followed suit and also undercut lows of the last four trading sessions. The one-day reversal pattern on stocks like AAPL which had led the QQQ higher in outperformance also looks important as a short-term negative ahead of FOMC.
Bottom line, some minor selling looks more likely than gains over the next week, specifically as a result of Monday’s close. Yet, the forecast won’t turn truly bearish until/unless we see 387.60 violated, as the SPX also gets under 4612. This could lead to a QQQ near-term pullback to 370.6, or under to 360 before this stabilizes and turns higher.
Healthcare rally continuing, and has broken out of downtrend from September
One bright spot concerns the price action in Healthcare, which has exceeded the downtrend from the last couple months, which technically should allow this sector to show further near-term outperformance. While an end-of-week close means more than just one-day’s price action, this kind of strength in a leading SPX group like Healthcare is considered to be a positive while many other areas aren’t acting all that well near-term. This group should be overweighted near-term, as sector rotation seems to be leading to a push back into Healthcare. Part of this is Defensive positioning, while Vaccine makers like PFE, and MRNA have been thriving as the Omicron variant continues to spread. (The Chart shown below highlights Invesco’s Equal-weighted Healthcare ETF, (RYH) which is surpassing the downtrend of the last couple months)
Finally, it’s worth keeping an eye on the outperformance in the Defensives, as Consumer Staples Equal-weighted ETF by Invesco, RHS, has reached the highest levels since Spring. This huge surge in Defensive strength largely was absent during the Drawdown in September for US Benchmark indices. However, the fact that Junk bond spreads widened out meaningfully into late November and now Defensive groups are outperforming is certainly a wake-up call for the market, regardless if it’s December or not.
