Key Takeaways

  • Sideways consolidation still ongoing for US equities and no real technical takeaway
  • Dollar/Yen rally could bring about Japanese Equity outperformance
  • Biotech bounce is a positive for Healthcare after recent underperformance  
Biotech bounce a welcome development for Healthcare

The short-term sideways consolidation in Equities remains very much in place and some of this stalling out in Equities is thought to be due to the recent uptick in Bond yields.  As discussed, while the 3-4 month trend for Treasuries likely does turn higher (and yields lower), the short-term technical suggest a move back to new monthly highs is likely for Treasury yields.  This could prove to be a headwind for Equities in the month of June.  However, for the immediate future, no important technical takeaways are present, given the ongoing choppiness for US indices in recent days.  Equity strength into June FOMC is likely to temporarily reverse course for a pullback in Stocks into end of month.  At present, it’s right to remain bullish, as no technical evidence of this exists as having gotten underway. 

Biotech bounce a welcome development for Healthcare
Source: Trading View

Japanese Yen decline likely to bring about outperformance in NIKKEI vs SPX in the weeks/months to come

One interesting development in recent weeks is the extent to which the Bank of Japan’s experiment with bucking the tide on global interest rate hikes is causing its currency to plummet to levels which haven’t been seen in two decades.  I had discussed the breakout in USD/JPY in recent weeks, but this looks to be setting up a very attractive long trade and potential outperformance in the NIKKEI vs US stocks.

This blue line below signifies the Dollar’s escalation vs the Yen, shown as USDJPY.   The white line, however, is more interesting, as this is the ratio of NIKKEI to SPX, which has been underperforming over the last six years.

As can be seen below, during times of rapid Yen deterioration over the last 20+ years (shown here as USDJPY rising rapidly), the NIKKEI 225 index has outperformed US Equities.   This trendline on the relative relationship of NIKKEI to SPX (in white) is testing and arguably now breaking out of this long-term downtrend.

Overall, this bodes well for Japanese Equities despite the lingering questions of whether a weaker Yen is a net positive for Japan this time around, or whether this threatens destabilization and potential policy reaction out of other countries, like China.

Biotech bounce a welcome development for Healthcare
Source:  Bloomberg

NIKKEI 225 breakout to highest levels in months looks important

The NIKKEI is starting to rally sharply in recent days as the Yen hits multi-decade lows.  Wednesday’s breakout of its six-month decline makes this something to favor in the months ahead.

Its entire consolidation since early last year has not done much true technical damage and, despite this being shown in US Dollars which have benefited vs the Yen substantially, NIKKEI lies just -8.32% off 52-week highs, and Wednesday’s breakout looks like a real technical positive.

As previously discussed, those looking for attractive Japanese Equity ETF’s might consider ones that have hedged currency exposure, like WisdomTree’s DXJ 0.93% .

Biotech bounce a welcome development for Healthcare
Source:  Bloomberg

China also starting to outperform sharply

Given recent signs of Beijing’s regulatory landscape easing a bit, we’ve seen evidence of some strong outperformance in China in recent days.  Some of this could be attributed to a weaker US Dollar, while some might feel China’s crackdown on COVID is now ending, and the combination of that, along with its closure of the Didi probe, might constitute a more favorable environment for China in the weeks/months to come.

Technically the Chinese Technology ETF, KWEB 0.16% , has now risen to the highest levels since March, nearly three months ago.  This has severed the ongoing downtrend from last February’s peaks, giving optimism of a further rally up to the first important zone of resistance at $36 up to $38.70.  This lines up with prior lows from late 2018 into early 2020, representing the first true area of upside resistance to keep an eye on.

Biotech bounce a welcome development for Healthcare
Source: Trading View

Biotech outperformance is a welcome sign for Healthcare

For the first time in nearly two months, we’ve seen SPDR Biotech ETF XBI rise to the highest level of the month, exceeding the prior consolidation that’s kept this range-bound over the last few weeks. 

Some of this outperformance has come about directly as a result of Small-cap Growth starting to turn higher, and this mean reversal from Biotech heading into a seasonally positive time for the group likely allows Biotech outperformance to continue.

Interestingly enough, when plotting ratio charts of XBI to PPH (VanEck Pharmaceutical ETF), we’re seeing this XBI strength translate directly into a larger downtrend line breakout on ratios of Biotech vs Pharma for the first time since the most recent leg of this downtrend started last Fall. 

Stocks like BIIB 0.23% , VRTX 1.04% , MRNA 0.17%  are all higher by more than 1.5% today, despite broader market weakness, and I think Biotech should continue to make progress on an absolute and relative basis.

The larger downtrend from the February 2021 peaks will take some time before this also gives way to a breakout which would turn the larger trend back to positive on the ratio of XBI to PPH.  Thus, at present, this appears more like short-term strength than something which has lots of longevity.  Yet enough is there to consider overweighting short-term.  Technically I’m expecting XBI can rally up to near $80-81 without much trouble before finding resistance in the days ahead.

Biotech bounce a welcome development for Healthcare
Source: Symbolik

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