Defensive trading dominates as Pharma, & Utilities break out

Similar to Tuesday’s mild “down day,” Wednesday’s pullback failed to show sufficient deterioration to expect much follow-through just yet.

The key driver of this rally, Technology, has not given much of an indication of topping, and key index constituents like AAPL -0.41% , and MSFT 1.80%  remain trending higher and should press to new weekly highs into next week.

However, in a potential mid-to-late month advance warning sign of possible weakness, Defensive trading has certainly begun to dominate performance in recent days.  The Equal-weighted Utilities ETF, RYU, has broken out of its recent range, and Pharmaceutical stocks have also “been on a tear.”

Meanwhile, Treasury yield and the US Dollar remain trending down sharply.  The US Dollar index (DXY) has little to no real support until February 2023 lows near 100.82, while TNX likely pulls back to 3.15%, or even 3.00% before much support materializes.

Former cycle composite charts pinpointed late April as being the most likely time for both Dollar and Yields to attempt to bottom.  Rallies into May could be a possible catalyst as to “why” stock indices might selloff.  At present, there isn’t much evidence to support the view that it’s starting now.

Thus, breadth was certainly sub-par for Wednesday, and showed very risk-off type trading characteristics.  However, daily momentum is positive, sentiment has not grown too optimistic despite some mild improvement from deeply negative conditions, and uptrends have not been violated which would argue for any material drawdown.

Support for QQQ 1.55% , shown below, lies at $315.77, and it’s expected that a rally back to challenge this week’s highs at $321.63 could be likely in this holiday shortened week.  Movement above $321.63 likely drives a rally towards $324-$326 into next week before much evidence of stalling out.

Utilities breakout following strong near-term outperformance

Wednesday’s breakout in Invesco’s Equal-weighted Utilities ETF looks constructive and positive for further near-term outperformance in the weeks to come.

Absolute charts and relative charts vs. S&P 500 show Utilities breaking out technically, and this likely will lead to further strength into mid-to-late April.

Utilities has been the best performing Equal-weighted sector of the major 11 sectors over the last month, with 1 month performance of +4.32% vs. SPX performance of +1.36% in data through 4/5/23.

Near-term targets for popular SPDR S&P Select Sector Fund ETF’s like RYU lie near peaks from late last year which intersect near $88. While overbought on a short-term basis, pullbacks in XLU -1.09%  likely will find support into next week ahead of further strength into late April.  Intermediate-term resistance for XLU -1.09%  lies near $120. 

This uptick in Defensive trading could prove negative for the broader market if sectors like Technology start to falter, or Financials weakens vs the S&P 500 down to new monthly relative lows.  At present, this Equity market two-day pullback looks buyable and higher index prices into next week might prove to be a better time towards overweighting the Utilities.

As seen below, this breakout looks to be a clear technical positive.  However, following a +2.59% gain on Wednesday alone (4/5/23) price closed over its 2% Bollinger Band for the first time since last November.   Despite gauges of momentum like RSI not having reached overbought levels just yet, it’s likely that consolidation might occur into next week before this starts to turn up more rapidly.

My three favorite technical patterns within the Utilities are as follows: PNW -0.69% , EIX -1.39%  and ED -1.25% .

Pharmaceutical ETF PPH 0.32%  also achieving triangle breakout

While Utilities and Staples have surged higher, sub-industry groups within Healthcare like Pharmaceutical stocks have also achieved near-term breakouts of intermediate-term triangle patterns.

This group is also quite defensive, but is preferred over the Utilities, Staples or other Defensive sectors like REITS.

While Pharma strength failed to keep pace with Broadline Retail, Energy Equipment, or Entertainment stocks over the past week, much less Tech Hardware, it did make a meaningful near-term triangle breakout which bodes well for additional gains.

Stocks like MRK 0.18% , LLY 1.15% , BMY 0.34%  have some of the better near-term charts within US Pharmaceutical names.  However, some compelling evidence of bottoming has been seen lately by stocks like PFE 0.59%  and JNJ -0.60% , and these could show further strength, as well, in the weeks to come.

Daily closes back over $80 in the VanEck Pharmaceutical index (PPH 0.32% ) could result in strong upward acceleration which likely tests last Spring’s peaks.

Healthcare very close to breaking out.  Expect outperformance in the weeks to come

Finally, it’s proper to mention strength of the Healthcare sector as a whole, and relative strength has driven this sector back to the highs in relative terms vs. the S&P 500.

Prior peaks in relative strength happened back in December 2022, and this level looks to be challenged and possibly exceeded in the month of April.

While many investors rightly still struggle to find meaningful strength in the Biotechnology and Healthcare Services sector, groups like Pharmaceuticals have taken the lead over the past week in leading Healthcare higher.

I had highlighted Healthcare back in January as one of four sectors to overweight for 2023, along with Technology, Industrials, and Energy.  I feel that recent strengthening in Healthcare is constructive and it won’t take much to cause a relative breakout in Healthcare vs the S&P 500.

Daily charts of RYH vs. RSP 0.04%  (Invesco Equal-weighted Healthcare ETF vs Invesco Equal-weighted S&P 500) show a big basing pattern with formidable strength lately to challenge the recent highs of this pattern.

Technically I like overweighting Healthcare ahead of any impending breakout and feel this uptick in defensive performance could signal the start of further Healthcare outperformance.

Any breakout in RYH above last December 2022 peaks vs. S&P 500 should signal the start of some meaningful outperformance in this sector. 

Healthcare’s outperformance over the past week has proven strong enough to lift this sector ahead of 10 other sectors when viewing the SPDR S&P 500 ETF’s.   XLV 0.01%  trails only XLE -0.92%  over the last week, with returns of +4.54%.  My view is that more strength is forthcoming.