The SPX’s near-term decline is ongoing, regardless of some brief stabilization attempts on Monday. While US indices are now in the window for a possible change of trend, more upside follow-through will be needed to have proof of an impending advance. Technically I think this happens Tuesday/Wednesday and results in sharp rally for US Equities.
2-year yields fell at the fastest pace in over 35 years over the past three trading sessions, a full 100 basis point (bps) move in 2-year yields. That hasn’t been seen since Black Monday in 1987 and certainly is making investors consider changing their economic forecasts to reflect this collapse in Financials.
While it’s premature to say that this Financial undoing might be a more important factor to the FOMC than CPI or PPI reports coming out this week, it’s worth reporting that Spread markets have moved enough to reduce expectations to Zero for any further FOMC rate hikes in March. Nomura went so far as to forecast a 25 bps Rate cut and Quantitative Tightening halt in March.
US Dollar has begun to roll over coinciding with US Treasury yields pulling back. This has helped precious and base metals start to rally while Crude oil has remained stubbornly under pressure. Yen, Euro and Pound Sterling all look to advance in the days/weeks to come.
Overall, economic reports over the next two days certainly have the potential to cause more volatility. However, the relative strength in Technology continues to be impressive. Furthermore, the act of Healthcare recovering very sharply over the last two trading days (Monday included) is a very constructive development, in my view.
While it might be premature to think Healthcare strength can completely offset Financials weakness, it’s certainly helpful to see that Technology, Discretionary, Industrials were all stronger relative to S&P 500. Healthcare and Communication Services were positive by greater than +0.50%.
Defensive groups did show some relative strength on Monday. However, insufficient strength was present to argue that Staples, Utilities, and/or REITS are areas to favor. As has been discussed in recent days, Healthcare is the one partially defensive sector that looks appealing.
SPX daily chart shows price having pulled back to just above last December lows. There has been a definite break of the 200-day m.a. along with a break of its uptrend. Thus, a rebound is imperative this week, and ideally on Tuesday/Wednesday.
The ability of recovering SPX 3928 would be a great sign, which signifies the initial upside resistance. Downside support lies near last December 2022 lows, which lies from 3764-3800. Only if December 2022 lows are violated would the 4-6 week forecast turn more negative.
However, even in this scenario, prices should bottom out in May and turn higher into Fall of 2023.
2-year Yield plunge provides dramatic steepening in 10’s-2’s curve
Incredibly enough, 2-Year yields plunged by the most in over 30 years with the last meaningful three-day drop happening in 1987.
This current 10’s-2’s spread is now “just” -47 bps, which has steepened by greater than 60 bps in the last three trading sessions.
I anticipate further steepening given the breakout of this lengthy trend, and the broader Treasury rally across the curve looks to be well underway.
KRE/KBE ratios started giving warning signs last Fall
Technically, Regional banks started withering as rates started to pull back beginning last October. As the daily Symbolik chart shows below, this ratio of KRE to KBE has been sounding alarms of underperformance in the Regionals for the last five months.
Interestingly enough, what was a further warning sign, potentially, was the lack of Regional bank rally and outperformance as yields rose during the entire month of February. Normally, this would be thought of as a time when KRE should outperform KBE. Yet, the opposite happened.
Weekly ratio charts of $KRE to $KBE on Symbolik now show the potential to stabilize given such a large period of underperformance by the Regionals in a short period of time.
However, given that this sudden break in Financials has happened so rapidly which caused such a big downward shift in momentum on multiple timeframes, I am not inclined to begin giving technical long ideas within this space without much more evidence of stabilization.
Despite being oversold, Financials look like an area which could underperform further given intermediate-term breakdowns on multi-year charts vs. the S&P 500. Financials have turned negative, and should underperform in the weeks/months ahead, regardless of any tactical trading bounces that occur.
Healthcare rebound in relative strength has been dramatic in recent days
Healthcare looks appealing technically, and I expect further relative strength in the weeks and the months to come.
Interestingly enough, the ratio of Equal-weighted Healthcare vs Equal-weighted S&P 500 made a very dramatic rally since last Friday that gives hope for this sector finally kicking into gear after the last couple months of lagging.
Biotech and Medical Devices look most appealing, while Pharmaceutical stocks also could strengthen, and this latter area remains attractive given its defensiveness.
I’ll discuss some of the specific sub-sector movement in the days ahead, but this recovery in Healthcare could very well take the place of Financials in a way that could help markets hold up despite Financials acting poorly.
Daily Symbolik charts show $RYH having recovered nearly 70% of its relative decline from late December over just the last week. This looks like a tremendous uptick in momentum, that will grow even stronger if/when this relative chart breaks out over last December highs. I believe That should usher in a very strong period of outperformance in this entire sector.
Healthcare is one my of my four technical Overweights for 2023, with the others being Industrials, Technology, and Energy.
Some of my favorite Healthcare names right now are : $BSX, $MRK, $REGN, $VRTX, $BMY, $HUM, $LLY, $HOLX, $MRNA, and $PFE.