The important takeaway for all investors Wednesday focused on Stock indices being able to rally sharply off the lows despite poor Tech earnings as rates followed through further to the downside. That’s an important point, and while I don’t normally utilize news to determine stock index movement anyhow, it shows us all that markets are focusing more on interest rate changes (and should eventually focus on declining inflation) more than negative earnings. While prices did slump into the close, hourly charts below show this not to be important in causing any sort of meaningful trend change from higher to lower. Overall, DeMark counts would reach exhaustion by some early positive news which could lift $SPX briefly up above 3897 in SPX Futures, or above 3886.15 in SPX cash before any short-term peak is in. Finally, I feel that rates likely stabilize here and should turn back higher for another upward thrust at recent highs. This might cause some near-term volatility in stock indices into next week, but ultimately should prove short-lived if what I’m thinking is correct. I remain positive for higher prices into December, despite the possibility for a near-term pullback starting in the days ahead.
“FAANG” earnings have slumped, and technically it remains tough to overweight “FAANG” just yet
Earnings in many of the large-cap growth Stocks within Technology have seemingly disappointed, and technically speaking, the breakdown in stocks like $GOOGL, $META, $MSFT has caused some weakness in daily chart formations and has occurred on the above-average volume.
This likely serves as a near-term headwind for Technology to continue its recent outperformance, and likely also a headwind for SPX in the short run.
Charts of the NY FANG index (Bloomberg) graphed as a composite of this index along with adding Microsoft $MSFT is shown below, entitled “My FANG Index” (This shows performance of this basket, which I’m labeling “FAANG” given its inclusion of $AAPL and MSFT).
Technically, this has been in a relative downtrend vs. the S&P 500 since February 2021, and the violation of the multi-year uptrend on an absolute basis happened in January of this year (Shown as the Composite breaking down under the upsloping black trendline).
Key lessons: Relative weakness and/or strength normally will start before the absolute move. Charting relative performance vs SPX and charting the sub-sector performance vs its Sector normally is worthwhile towards showing breakouts or breakdowns which might not be seen on an absolute basis (i.e. FAANG starting to wane in 2021 ahead of the larger absolute breakdown).
Below we see some minor attempts in “FAANG” to stabilize but relatively speaking, this composite has just broken down under May lows to new lows for the year. Thus, some evidence of stability in this group is imperative, sooner than later to help technology’s bounce to continue.
Technology has begun to bounce; yet still an overall laggard
One interesting development has been the swift rebound in Technology since early October. Many stocks among all sub-sectors rallied despite rates still pushing higher. However, now that rates have shown some evidence of rolling over, we’ve seen Tech rally up even faster.
A couple relevant points: First, relative charts of Invesco’s equal-weighted Technology ETF $RYT vs SPY (in ratio form) has not yet broken downtrends. Thus, relatively speaking, Technology has some further progress that needs to be made before confirming that this group should start to outperform. (This makes perfect sense technically, as $TNX will require a move lower under 3.83% to break its uptrend and confirm a larger breakdown in rates).
At present, we’ve seen a minor breakout of the two-month downtrend in $RYT, but similar to the broader averages, this remains trending down from the all-time highs.
Overall, I like Technology to outperform in November and December, but I feel it’s a must that Treasury yields to break existing uptrends to allow for a more meaningful push into Growth.
Healthcare breaking out again helping to buoy markets despite Tech woes
Healthcare continues to be one of the most important sectors investors should be focusing on, given it representing the 2nd largest weight in $SPX per market capitalization.
Just in the last few days, there have been some interesting bouts of strength, despite rates having begun to rollover, driving Technology higher. Over the past rolling one-week period, Equal-weighted Healthcare has outperformed all other Equal-weighted major sector ETF’s along with all other cap-weighted ETF’s, returning +6.46%.
This sector was one I highlighted last January as being one of the top sectors to favor for outperformance for 2022, besides Energy, Materials and technology. While Large-Cap Healthcare has trounced the equal-weighed sector in YTD performance, equal-weighted Healthcare looks to be making a comeback.
Optuma charts show both absolute and relative breakouts in Healthcare over the last couple days, making this group one to favor for 4Q outperformance. While a larger rollover in interest rates might help Technology show better relative strength, it’s thought that Biotech likely provides the strength upon confirmation of a breakdown in rates.
Until that time, Pharmaceutical stocks likely can strengthen further and might outperform Biotech while bearish market trends persist. Medical Devices should be close to trying to turn higher and outperform Healthcare services. However, this has not yet gotten underway.
My favorite stocks in Healthcare center on $HUM, $REGN, and $LLY in my Upticks list, along with $VRTX which I listed on my Institutional Upticks list a month ago.
