Technically, our recent three-day selloff likely marks an attractive opportunity following the huge run-up into late December. SPX lost nearly 90 points from its late December peaks, yet technically, trends have not shown any technical damage, and SPX looks to be bottoming just above former lows from 12/20/23. Russell 2000 along with the entire Technology sector look to be at support, while the Healthcare sector has achieved a meaningful relative breakout. Bottom line, a push back to test and exceed the peaks from December 2023 is likely.
A few key positives are now in place following the minor three-day decline that I believe make SPX more attractive than it was heading into Year-end. Specifically:
-RSI is no longer overbought on daily nor weekly timeframes on SPY and QQQ.
-Key SPX constituent sectors like Healthcare have just achieved relative breakouts vs SPX
-Technology’s pullback failed to do any damage to its relative chart vs. SPX
Overall, given that negative momentum divergence had begun to creep back onto daily charts of SPX and QQQ following the run-up into late December, the recent selloff looks appealing from a risk/reward perspective. Optimism has also reappeared in recent weeks, and as discussed in mid-December, a few metrics suggested at least a minor pullback should be approaching.
At present, after just three days of selling, no serious technical deterioration has occurred, but yet momentum is in better shape after the minor selloff. Moreover, other sectors like Healthcare have begun to show more evidence of strengthening. While I suspect that this isn’t the larger decline that will eventually be needed to erase some of the weekly overbought conditions in many sectors, I feel that the recent selling is sufficient to consider SPX a much better risk/reward than a few weeks ago, and that short-term lows are close.
As the hourly chart shows below, SPX has lost nearly 90 points in just three days’ time. Yet, 12/20 lows have not been undercut. Hourly momentum is nearing oversold levels while Fibonacci projections show this recent decline as likely being nearly complete.
While 12/20 lows of 4697 could be tested given that prices closed down close to Wednesday’s intra-day lows, I do not feel that 4665 is broken this week.
The initial level that needs to be exceeded to have confidence that lows might be in lies at 4731. Over this would be a great technical sign. Additionally, the ability to surpass 4751 should lead back up above 4840 in the weeks to come.
Overall, until/unless 4665 is breached, this pullback should likely begin to stabilize and turn higher in the days ahead, technically, and this should begin on Thursday/Friday of this week.
S&P 500
Santa Claus Rally period has finished negative; Yet, this doesn’t necessarily mean 2024 will be down
Despite this recent Santa Claus period having turned in negative returns it’s still premature to jump to conclusions. (Santa Claus rally (SCR) period is defined as the last five trading days of the year along with the first two of the new year).
Over the last 80 years, the SCR period has been negative 15 times, and the year as a whole has still turned in positive returns 10 of those 15 occasions with a median return of +3.0%.
The table below ranks these negative SCR periods by worst to best, showing that early 2000 proved to be the worst of any SCR period since the early 1950’s.
Three of the five occasions which resulted in negative years performance had an SCR period of -2.5% or worse.
When excluding these three, 12 of 15 years were still positive if SPX had returned -2.5% or better during this time.
Our recent SCR period turned in -0.6%, which is better than nearly all the negative periods listed below.
However, in the instances of negative SCR returns, the year as a whole tended to be worse than usual.
Overall, I don’t feel this SCR has much bearing on the year being negative, and it will be important to watch the first five trading days along with the month as a whole to have a better gauge based on historical seasonal trends alone.
Technically, as I’ve discussed, the market remains in great shape on an intermediate-term basis, but merely had some short-term reasons for concern. I feel that the three-day selloff alleviated many of these short-term concerns, for now.
Healthcare Breakout is constructive for SPX and likely for NASDAQ
Healthcare has proven to being the strongest of any of the major SPDR Select sectors over the past week, with XLV -0.37% outperforming any of the remaining 10 sectors with returns of +2.56%.
However, even on an Equal-weighted basis, Healthcare is third best over the last week and has quietly assumed the #1 spot over the past month, with returns of +8.33%, trouncing the SPX by more than 500 basis points. (b.p.)
As seen below, Healthcare has now broken out of the downtrend vs. the S&P (Both in equal-weighted terms) going back since last Spring.
This is an important development for a sector that represents the 2nd highest percentage representation of the S&P 500, behind Technology.
I view the Healthcare breakout as being a necessary tailwind for upcoming market strength, and part of the larger broadening out in the market since October.
However, the timing of this outperformance is also very much a mean reversion tendency, as this sector lagged the broader market last year.
Its recent strength is encouraging for Healthcare, and I suspect that additional outperformance is likely for the Healthcare sector in 1H 2024.
Technology has not shown any relative damage vs SPX despite recent selling pressure since late December
Despite Technology’s -2.89% decline over the past week, far and away the largest percentage loss of any major sector, the sector remains trending higher vs. SPX.
While many suspect this underperformance might be due to some early year mean reversion, where winning sectors from 2023 lag, while former lagging sectors start to show better relative strength, one cannot yet say that Technology is a lagging sector on most timeframes.
The weekly chart below of Invesco’s Equal-weighted Technology ETF (RYT) relative to Invesco’s Equal-weighted S&P 500 ETF (RSP 0.44% ) shows how this past week’s decline has affected its relative standing.
As seen below, there hasn’t been any meaningful breakdown and Technology looks to be at an attractive risk/reward for owning this sector on weakness.
Until/unless relative uptrends vs. the S&P 500 start to give way, one cannot read into this decline in “Tech” as being the start of anything meaningful.
