Key Takeaways
- Friday’s decline has achieved my Base case 2022 technical target and Friday’s reversal gives hopes for a short-term rally getting underway
- Very good price action in Equal-weighted Healthcare and Technology this week
- VIX recent lagging could be construed as bullish, sniffing out market bottom
Markets promptly reversed early uptrends to sweep under last week’s lows and officially reaching the 2022 Technical target which I released back in January as a Base Case scenario. SPX has reached -20% down, causing many in the media to proclaim that we’re now in an official bear market. The late day reversal however was constructive in recouping last week’s lows to close positive on the session, giving hopes that a minor bounce is underway. While I dislike making big counter-trend calls within downtrends, markets likely have exhausted themselves near-term to the downside and could rally into late May. Initial SPX targets lie at
4020-30, and above near 4100 remains important as resistance.
Technical developments over the past week
SPX’s decline has now reached the 38.2% Fibonacci retracement area of the 3/23/20-1/3/22 rally and is nearing a 23.6% Fibonacci time retracement of this prior rally, which could be initially important in coinciding with a minor low in Stocks.
The SPX’s decline has now officially been labeled a “Bear Market” by financial media, while many of us realize that in broader market terms, this has been a bear market for some time, given the degree of technical damage seen by many issues.
More than 60% of all SPX issues are lower by more than 20% from 52-week highs
Consumer Discretionary and Consumer Staples both show weekly losses greater than 6%, showing how supply chain costs are slowly but surely being passed through to the consumer
Treasury yields have wobbled and are showing increasing evidence of peaking out. This might be delayed officially until late May/early June, but expect TNX to drop to 2.40%
Technology has begun to relatively outperform SPX and Healthcare looks attractive, given its outperformance in recent weeks, resulting in a long-term relative breakout vs SPX. That both of these sectors are showing relative strength this week is important as to why Stock indices could rally.
Momentum is still not oversold on daily charts and VIX might have turned down ahead of markets bottoming. Overall, markets might be able to bounce near-term without getting excessively oversold.
Healthcare now breaking out in equal-weighted terms vs SPX? This should prove to be a tailwind for SPX
The relative breakout in equal-weighted Healthcare vs SPX, shown below is one of the key reasons for optimism. This suggests that Healthcare should work well into June/July. The fact that Healthcare is such a large part of SPX in percentage terms is a tailwind, given this strength.
My favorite technical names within Healthcare are quite a few Pharmaceutical names like MRK, PFE, BMY, LLY, along with a few Biotechs like AMGN, REGN, VRTX. Finally, HOLX, CI, MCK, and CERN are all acting well and could continue in the days/weeks to come. Given that Healthcare is nearing a seasonally bullish time, I like buying/owning all these names.
Below is the equal-weighted Healthcare ETF, RYH which has held up in resilient fashion despite the larger trendline break last year. The resulting consolidation hasn’t really done much damage. Yet the strength of Pharmaceuticals and Medical Devices stocks has now caused Healthcare on a relative basis to break out vs SPX this week. I expect this leads to further strength.
Healthcare seasonality suggests overweighting in June/July
This 10-Year seasonality grid shows that June into July has been one of the best times of the year to own Healthcare. November also stands out as being quite positive.
The average return in XLV -0.03% , the S&P SPDR Healthcare ETF, over 10 years has been +3.23% in July and +1.62% in June. Thus, Healthcare is turning higher right into this seasonally bullish time.
Finally, there’s been a lot of focus on the VIX lately, and whether this needs to truly spike and show backwardation as evidence of capitulation before we can claim that an equity index bottom is in.
Increasingly, I’m coming to the viewpoint that markets likely won’t experience further capitulation and can bounce in absence of this in the short run. Yet with many cyclical targets focused in late June/July, my thinking is bounces end up failing in early June and turn back lower. Many times the VIX can provide advance warning when turning down at a time when markets might be weakening, but not doing so in rapid fashion. Often, we’ll see VIX pull back and Equity indices follow suit. My belief is this likely is happening in the short run. Overall, one should use any meaningful pullback in implied volatility to buy dips, expecting that a move higher still is likely in the next couple months.
