The stock market just keeps on humming along. Both the S&P has rallied five days in a row…and has successfully moved above its key resistance level (its 50-DMA). In fact, for all practical purposes, the S&P 500 is now testing its all-time highs from the beginning of September……Yes, we suppose this means that the stock market could be forming a “double-top” (like it did in 2000 and 2007), but there is no question that the rally from the early October low has been an impressive one.
If there was one concern about this week’s leg in the bounce of the past few weeks is that it is coming on falling volume and mediocre breadth. The composite volume has fallen each of the last two days…and the breadth for the S&P 500 was only 2.7 to 1 positive yesterday…which is not good at all for an index that rallied 0.74%. Thus, this makes two days in a row where the “internals” were not particularly good. However, this just might be telling us that the market needs to take a breather after its 5.1% bounce since October 4th (and after it has rallied five days in a row)…rather than telling us that the recent rally does not have legs.
Even though the internals have not been very good the past two days, it HAS been impressive to see the stock market rally in the face of a rise in long-term yields. The yield on the 10yr note made a new high for this move…and sits at 1.63% as we write this morning. The rise in yields that began in August seemed to cause the decline in the stock market in September…and did the same thing back in September of last year…so the fact that the market is rallying in the face of this most recent rise in rates is impressive.
We do need to point out that interest rates continued to rally into the end of the year last year (and through the first quarter of this year)…and the stock market was still able to move higher. That could/should be a lot higher to do once the Fed starts to taper back on their QE program.
HOWEVER, even though the broad market was able to rally during most of the rise in interest rates year ago, the tech stocks were NOT able to do the same. Instead, the tech stocks underperformed during the entire rise of long-term yields (from September of 2020 until March of 2021). Therefore, if long-term yields keep rising, investors will need to be careful about how much money they push toward this sector going forward.
Shifting gears a bit, there is one sector that starting to look a lot better on the charts. We’re talking about the healthcare sector. We touched on the upside potential for the biotech group last week, but the broad healthcare sector is also starting to show some promise. The XLV healthcare ETF became very oversold at the beginning of this month. Since then, it has tested the $125 level several times (and held)…and now it starting to bounce off that level (which is just above its 200-DMA). The bounce over the past couple of weeks has given it a minor “higher-low/higher-high” sequence…AND it has also taken the XLV above its short-term trend-line from early September…so this is a positive development.
It’s a little too early to send a major green flag up the flag pole, but there is no question that if it can see a bit more upside follow-through, it’s going to be very bullish for the healthcare sector as we move towards the end of the year. This is especially true given that the XLV is seeing a positive cross on its MACD chart. As you can see from the chart below, every time the XLV has seen a positive cross on its MACD chart over the past year, it has been followed by a strong rally in this sector. Therefore, if we get any upside follow-through, this sector should be one that does VERY well over the last 2.5 months of this year.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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