Happy Holidays. Hope your holiday season proves safe, happy and healthy. I will be taking the final week off to spend with my family during the holidays. There won’t be any written reports until January. Thanks as always for your support and interest in my work. Happy New Year!
Thursday’s decline on better-than-expected Economic data proved to be a far more severe setback than expected with just five days remaining, but near-term oversold conditions should still allow SPX to hold 3700 and produce a bullish bounce into end of year before additional selling. Unfortunately, the technical structure looks quite poor when viewing its hourly pattern since November, and it might prove to be difficult for bounces to eclipse 3950 which was thought possible a few days ago. Overall, I do like buying dips down between 3706-3767 for a bounce up to 3900-3950, but I’m skeptical given Thursday’s weakness that prices get over 3950. As hourly charts show below, this is strong “neckline” resistance on hourly charts. Rallies into end of year likely will stall out, and yield to cyclical downward pressure which could take SPX lower into late January. Technology continues to be the “weak link”, and difficult to embrace. SPX Support lies at 3765, or 3705, while QQQ support lies at 257-9 into Friday/Tuesday.
QQQ reversal likely points down to 257-9 before stabilization and bounce into end of year from next Tuesday
QQQ reversal Thursday certainly changed the course of the bounce quickly and makes a couple more days of weakness possible now before any end-of-year bounce gets underway.
Unfortunately, this means our “end-of-year” rally might not get underway until Tuesday of next week, given Monday’s closure for the Christmas holiday. It’s still likely that the last three days of the year can be positive, however, as momentum has gotten oversold and QQQ likely will stabilize and bounce at an area near November lows.
However, this lack of upward participation is a definite negative for the trend in January after the bounce into year-end, as the lack of strength is considered a technical negative for trends and momentum at a time when cyclical projections remain negative into late January.
DeMark indicators for QQQ on Symbolik show another two days of weakness in all likelihood before a TD Buy Setup materializes, which is a far stronger signal than the “13 Countdown Buys” that were present on 60- and 120-minute charts heading into yesterday before the rally.
Overall, I expect QQQ to weaken to 257-259 before finding support next Tuesday, and then Tuesday mid-day through Friday likely can bring about a bounce into year-end.
Homebuilders continuing to show strong outperformance
Homebuilders have shown very good outperformance over the last eight months of 2022 after having bottomed out relatively speaking in April.
The combination of Treasury yields rolling over in October along with the price of Lumber having plummeted down under $400 in 2022 to the lowest levels in more than two years looks particularly relevant as to reasons why this sub-sector might show good relative strength.
Technically, ITB remains above June lows (absolute low for 2022) by more than 25%, but appears to have found brief resistance near August 2022 peaks near $64.
However, the relative picture of this group looks quite appealing, as charts of ITB -2.53% , the Ishares US Home Construction ETF, look to have broken out vs. RCD, the Invesco Equal-weighted Consumer Discretionary ETF, on a relative basis going back since 2020, more than two years ago.
As seen below, while the period of 2017-2018 was negative for Homebuilders, they experienced strong outperformance within the Consumer Discretionary group from late 2018 into late 2020 before beginning consolidation.
When eyeing the strong outperformance in Consumer Durables in the last month (+7.52% in one-month performance through 12/21/22) this strength has been primarily led by Homebuilders and Home construction stocks. I expect this to continue into 2023, and favor DHI -2.42% , PHM -2.14% , LEN -2.26% , TOL -3.40% , PVH -2.55% and MTH -3.76% as some of my favorites, technically. LEN is on the UPTICKS list.
Pharmaceutical Outperformance in early 2022 likely kicked off a bull market for this sub-sector within Healthcare
While many are eyeing Biotech as being a strong contender to lead the next Bull market given its strength in 2H 2022, it’s been the Pharmaceutical stocks which might deserve a bit closer look.
PPH 0.08% the VanEck Pharmaceutical ETF, successfully broke out of nearly a decade-long downtrend vs RYH, the Invesco Equal-weighted Healthcare ETF back in early 2022. While this only lasted until May before backtracking in the back half of the year, it’s slowly but surely turning back higher again.
While PPH does contain some companies that have substantial overlap with different areas of Healthcare, stocks like MRK 1.44% , LLY -2.04% , ABBV 0.09% , and BMY 0.46% look particularly attractive, technically.
Overall, Pharmaceuticals look more technically appealing heading into end of year than Biotech stocks, Medical Devices as well as Healthcare Services. Given the semi-defensive nature of this group, it also fits in with the current sector rotation trends given that markets remain trending down since early 2022.
Once Pharmaceutical relative charts vs. RYH move higher to take out early 2022 peaks, this will start to show more aggressive upside acceleration, and will begin to gain more visibility. In summary, this area looks very good to me technically, and I expect outperformance in 2023.
Mass Pressure index shows this week’s bottom to likely carry higher into 2023
I’ll highlight the Mass Pressure index for the final time this year, which has proven to be a valuable roadmap for 2022.
For those unaware, this cycle composite is comprised of numerous prior years all compiled together with particular importance this year on the 60-year, or 1962. Back in 1962, similar to 2022, stock indices dipped into June before double-dipping in October before rallying higher into end of year.
As seen below, the early year underperformance double-dipped into June and July before turning higher. However, the low for the Fall occurred in October, similar to 2022. The 60-year cycle had particular dominance, however, as weakness into October was far below other years which were utilized in this cycle composite.
The arrows on this chart show the similarities thus far, and correctly showed a period of early December consolidation before indices were set to bottom this week. Unfortunately this looks to be delayed given Thursday’s decline, which argues for a bit more weakness into Friday/Tuesday before a bounce attempt over the final days of the week into year-end.
While the Mass Pressure composite does not always reflect a year’s swings as accurately as it did for 2022, (This year was a far more accurate depiction than the last five years) this is always something to consider when planning out a year in advance. I’ll continue to monitor this closely as the new year gets underway and show what 2023 has in store in January.
Happy Holidays to All! and Thanks for your support and interest.
