Equity trends remain bullish but fragile as November gets underway. Treasury yields and the US Dollar look to all be close to beginning a corrective pullback, which likely starts in November, but should prove short-lived and not the start of a larger decline. Minor SPX decline, which has reached two straight weeks, has failed to do much damage, and Friday’s intra-day reversal might have been the start of a pushback to fractional new high territory. While intermediate-term bullish thesis remains very much intact, the degree of breadth deterioration is getting to be a concern towards thinking that Equity indices require consolidation sometime in the next 4-6 weeks. Signs of both Healthcare and Technology acting well should provide a tailwind towards gains into/post-election. However, any rally back to new highs makes the risk/reward more unfavorable for weakness into early December. SPX should find initial resistance near 5900-5935. Meanwhile, QQQ should find resistance at 503-505.
The SPX held where it needed to and started to turn back higher Friday, led by both Healthcare and Technology, despite the minor AAPL weakness.
It’s thought that it’s still difficult to make much of this past week’s minor weakness. However, the low breadth readings could make the weeks ahead prove tricky and volatile.
Many investors seem to expect “smooth sailing” once the election is past, given the 4Q seasonality and the markets successfully navigating the most difficult seasonal time of the year. However, it’s worth pointing out that most bullish November and December months normally follow a difficult stretch from August to October. This year has obviously proven much different as US Equities have been able to successfully push higher during each of the last three months.
While that normally would seem positive from a momentum standpoint, market breadth is much lower than it was just a couple of months ago, while there remains negative weekly momentum divergence on the pushback to new highs into mid-October.
However, as seen below, two straight weeks of losses isn’t really sufficient to claim that trends have turned down. Price has pulled back to levels right above this past Summer’s peaks while Bollinger bands show good support for SPX along with AAPL on daily charts. The weekly chart below likely offers an attractive opportunity for a push-up into next week, and until further evidence of trend damage occurs, it looks more likely that rallies occur in the first half of November.
S&P 500 Index
Healthcare has perked up; Could rally into year-end
One interesting development concerns the sudden strength across the Healthcare sector. This seems more earnings-related than politically driven but it has resulted in XLV breaking a minor downtrend from the last couple of months.
Daily XLV -1.83% charts also show the formation of DeMark’s famous TD Sequential indicator, which helps to give some conviction that an oversold bounce might be near.
While many sub-sectors like Biotechnology, Pharmaceutical stocks, along with Medical Devices and Healthcare services haven’t turned up sharply thus far, there have been some attractive technical breakouts in stocks like Waters (W -0.28% ) and Cardinal Health (CAH -0.46% ) which both look promising in the months ahead.
I’ll continue to provide an update as to this group’s progress. Currently I have this rated a Technical Neutral rating and feel that some of the recent underperformance within Healthcare likely is reversed as a bounce occurs into year-end.
As seen below, XLV bottomed right near the all-important 61.8% Fibonacci retracement zone of the prior rally. Furthermore, the combination of a minor trendline breakout on a push to multi-day highs coinciding with DeMark-related “13 Countdown” exhaustion signals normally can be important towards providing some relief. I expect a push up to $153 in XLV but cannot yet call for XLV to move back to new highs.
S&P 500 Healthcare Sector SPDR * XLV
Equal-weighted Healthcare vs. S&P 500 ratio is triggering first weekly buy signal in 18 months
Healthcare’s dramatic underperformance lately looks to be possibly ending, given the formation of a weekly “13 Countdown” signal on the ratio charts of Healthcare vs. S&P 500, both in Equal-weighted form.
While the downtrend in this sector vs. S&P remains strongly bearish, the dramatic underperformance could reverse and bounce in the coming weeks, given the formation of this signal.
Technically, I’ll need to see more evidence of strength before raising this sector to an Overweight, but I do sense outperformance might be possible in the months ahead.
This thinking is based partly on expecting mean reversion for the laggard sectors given that November has gotten underway. Many November/December periods offer attractive risk/rewards to own severe underperforming sectors which normally can bounce into the early part of the following year.
Healthcare looks to be my mean reversion sector candidate for Q4 Strength.
RSPH/RSP
Biotechnology demands selectivity until this can break out
Biotechnology has not yet broken out in a way that suggests favoring this specific part of Healthcare.
As shown below, the pattern does look quite constructive as a large symmetrical triangle pattern that normally is resolved by a push back to the upside.
However, patterns like these can continue to grind sideways but become increasingly more attractive from a risk/reward perspective as they near the apex of the triangle pattern.
In this case, since Healthcare arguably should begin to turn higher, I feel that owning Biotechnology here in a sideways range-bound pattern makes sense.
Furthermore, once XBI -2.87% can exceed the September highs near $103.51, this would bode well for upside follow-through, which would finally result in Biotech stocks starting to gain relative strength.
SPDR Series Trust SPDR S&P Biotech ETF
