Thursday’s CPI release should prove pivotal for markets

Equity markets have enjoyed a bit more bounce than expected into Thursday’s CPI report, but if the downward bias of cycles into late January along with the formation of intra-day exhaustion into Wednesday’s close for SPX, QQQ are any guide, Thursday might be a turning point for weakness into the back half of January.  Treasury yields look to have bottomed, and the rally in many sub-industry groups like Retail, Autos, Casinos looks to be nearing resistance to sell.  The question is whether this recent bounce represents the start of a meaningful rally, and whether it should be trusted or not.  The honest answer, technically speaking, is that it remains difficult to say that with any confidence, but I expect that January should bring some clarity to this question in the days ahead.  At present, prices look to have just exceeded the 50% retracement zone of the late December range, and I expect that 3975 should prove important for SPX and 278 for QQQ.

Small Caps seem to be nearing resistance of their own

This new year has brought about a nice bump in Small-caps which many feel should kick off a period of outperformance given their widely known discount to Large-caps approaching the biggest in years.

However, daily charts don’t support that Small-caps have made enough progress to make this call.  Daily IWM-0.37%  charts show prices still underneath the downtrend from last Fall, and IWM is just below what’s believed to be meaningful resistance at 184. 

Until/unless this downtrend is exceeded, (and yes, it will be right to pay attention if it is surpassed), trends are down, and IWM should be nearing strong resistance and could reverse course into late January.

Retail also seems to be nearing the “moment of truth”

Consumer Discretionary has gotten off to a marvelous start this year, with gains of more than 6% in the first two weeks of January.  However, similar to charts of IWM-0.37% , prices are now nearing key “make-or-break” territory.

Technically, it’s difficult to weigh in that this recent rally should continue, until/unless there’s evidence of this downtrend being exceeded.

While XRT, the SPDR S&P Retail ETF has trended higher sharply in the month of January so far, it will require a breakout above $67 before trusting that a larger advance is underway.

Rallies into this trendline just below at $66 should represent strong resistance this week heading into Thursday’s CPI report.

For those inclined to stay long Retail, I believe selectivity will be key for this sub-sector.  Stocks like DECK-0.18% , TPR, ULTA, TJX, ORLY1.89% , AZO0.23% , and ROST0.13%  have certainly shown the most momentum.  The Auto Retailers specifically remain still quite attractive, and I like both ORLY and AZO technically speaking.

Casinos have also moved up far too quickly and near important resistance

Consumer Discretionary’s outperformance has also been stoked by above-average gains in Casino stocks which have shown superior performance to nearly every other area within Discretionary.  Stocks like WYNN, and LVS have nearly doubled since last June’s lows, but now are approaching very important levels which should make these rallies stall out and reverse course.

Charts of WYNN, shown below, bottomed out near $50 last June and are now approaching 100, a doubling in price.  However, momentum has now gotten overbought, and prices are nearing a very critical long-term downtrend which likely stops this rally into end of week.

While buying dips might seem proper given such a huge upshift in momentum of late, I’d prefer to see at least 38-50% of this rally retraced before having much confidence that these have approached better risk/reward areas to consider.  Given that WYNN has risen over 60% in just the last three months alone, the biggest percentage gainer of all stocks within the XLY, this looks to be a poor area to consider holding longs, and better opportunities are found lower.

Dips might find support in the weeks/months to come near $81, representing the 38.2% Fibonacci retracement of its rally off October lows, but one should look below that to $70-$75 to find a better suited area to consider WYNN.  See WYNN’s daily chart below which has moved up to just below this strong downtrend.  LVS has made a nearly identical move and also lies near its own intermediate-term downtrend.  Resistance for LVS0.66%  lies at $55-$56.

Healthcare’s weakness should provide buying opportunities.

Finally, it’s worth discussing Healthcare, which has turned in the worst performance of any of the major sectors thus far in 2023. (XLV0.04%  worst out of 11 SPX SPDR Select ETF’s)

Many of the US Pharmaceutical breakouts have failed to follow-through in recent weeks, notably, BMY, JNJ, and PFE, which are not nearly as strong as stocks like MRK, or LLY. 

Meanwhile, the Biotech breakout also has yet to materialize, (though I suspect this is forthcoming ) Medical Device names have managed to gain back some ground, and look superior to Healthcare Services.  Yet, it’s the Biotech and Pharma group that still look most appealing (and Life Sciences within Pharma is starting to improve, slowly but surely)

Looking at the relative chart of Invesco’s Equal-weighted Healthcare ETF (RYV) to Equal-weighted SPX, it’s notable that the breakout attempt in this group recently failed.   Healthcare has been largely neutral in its relationship to SPX since Spring of 2021.  However, weekly momentum remains quite strong given the rally from the lows of this channel starting last Fall (2022) Recent weakness in the last couple weeks has now neared the most recent uptrend line in relative terms of Healthcare vs SPX, and given that Equity markets could be nearing short-term peaks in price, it’s thought that this recent weakness should turn out to be a buying opportunity for this group, which typically outperforms during times of market weakness.

Pharmaceutical stocks should be overweighted until US Stock indices can show more proof of breaking out of ongoing downtrends. However, Biotech is thought to be a leadership group for the next bull market, and a weekly close back over $138 in IBB-0.68%  would provide a springboard for Biotechnology for strength into Spring 2023.

Relative chart of Equal-weighted Healthcare to Equal-weighted SPX is shown below.