Looking back at the start of October, we’ve seen a very nice kickoff to Q4, and almost too nice of a start following over a 5% gain in Stock indices over the last two trading days. S&P gained more than 200 points, representing the best two-day S&P gain since April 2020. Breadth showed an even more impressive gain with nearly eight sectors turning in gains of 3% or greater on an equal-weighted basis. This kind of rapid bounce is normally dismissed by many as being short-covering, and some of the stocks which rallied were indeed former laggards. However, our pullback into October had multiple reasons for reversing course as has been discussed numerous times in recent days. Most importantly, sentiment and cycles lined up at a time when seasonality turned bullish while breadth was extraordinarily compressed. Overall, I suspect that some consolidation could be due before this rally extends too much more, and overhead resistance near SPX-3890 is strong while some backing and filling looks like a real possibility. Overall, long positioning is favored, looking to buy dips in the days ahead for rallies back higher into mid-October. First important upside target looks to intersect near 3890 and then 3950 on gains.
Healthcare really kicking into gear
Don’t look now, but my 2022 Sector overweight of Healthcare has finally started to trend sharply higher, at a time when many had given up on this sector.
The early year outperformance was given back during July/August timeframe, but the sudden push higher in relative terms has hit the highest levels in nearly two years on a relative basis to SPX.
Pharmaceutical stock outperformance typically gives way to Biotech as risk appetite returns, and I suspect this time should be no different. However, given that this strength is widespread when viewing Equal-weighted Healthcare, there should be an above-average rally getting underway for Medical Devices along with Healthcare Services stocks.
Importantly, given that Healthcare is the number 2 ranked S&P Sector by percentage at 15%, this relative breakout should provide a major tailwind for Q4 gains for the group and should help S&P act a bit better. Bottom line, Healthcare should be overweighted.
My favorite stocks within this space technically are as follows: $VRTX, $REGN, $LLY, $LNTH, $HUM, $MCK $MRNA, and $UNH. However, this sector has a large number of stocks hovering near 52-week highs which I suspect should act quite well between October and December.
Treasury yield decline directly coinciding with Equity strength
As discussed over the last week, to have real confidence of a stock market rally which is led by Technology, it’s likely essential that Yields start to roll over. This should fuel Growth and provide a decent bounce at a time when many least expect it.
The 40 bp decline in rates over the last week has been strong enough to break uptrend lines on the US 10-Year Treasury Yield ETF for the first time since this uptrend line began back in mid-August.
Importantly, the DeMark based “13 Countdown” exhaustion “Sells” I was looking for did not yet materialize. (These are present on weekly charts of $TYX, but NOT $TNX just yet)
Elliott-wave structure seems to indicate that this yield rally is close to completion, but might require one final push to new highs. Overall, given the correlations, this likely would lead Equities down to potentially test recent lows and consolidate this two-day 5% move.
Bottom line, cycles start to have a negative influence on Yields from October into December. It’s expected that Equities turn higher during this period and this week’s early Treasury and Equity strength is a sign of what’s to come.
However, one cannot rule out a retest of yield highs in the days/week ahead. This would result in better buying opportunities for Treasuries in my view as yields should be on the verge of a larger fall.
Percentage of Stocks hitting new 52-week lows showed huge divergence for NASDAQ at the bottom
Interestingly enough, the percentage of stocks hitting new 52-week lows has plummeted over the last two weeks, with much of this decline happening ahead of this week’s Equity bounce.
This was just one piece of the puzzle, but this divergence was considered a definite positive that spoke to the possibility of stock indices rallying. (NDX managed to retest lows in the last week; Yet, the number of stocks hitting new lows proved to be far lower).
These divergences are typically useful to monitor at both highs and lows, and this case seems to have emboldened the bullish case towards buying dips into this first week of October.
