REGENERON, VERTEX, AND AMGEN LEAD BIOTECHS HIGHER -- AFLAC AND PRUDENTIAL ARE LIFE INSURANCE LEADERS -- STOCK INDEXES TRY TO RECLAIM 200-DAY AVERAGES -- SMALL CAPS NEED TO SHOW MORE BOUNCE
BIOTECH ISHARES TRIES TO REGAIN UPTREND... Chart 1 shows Biotech iShares (IBB) testing a falling trendline drawn over its July/September peaks. It has already regained its 50-day average, but remains below its 200-day line. Its relative strength ratio (top of chart) is also starting to recover from its September drop. What the group does from here will also have an impact on the broader healthcare sector which is trying to regain its footing as well. Price action in some of the larger biotech stocks may bode well for the group and the sector.
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Chart 1
REGENERON, VERTEX, AND AMGEN ARE BIOTECH LEADERS ... It's usually a good sign for any group when several of its largest stocks are doing better. And that's the case here. Three of the largest holdings in the Biotech iShares also happen to be some of its strongest gainers. Chart 2 shows Regeneron Pharmaceuticals (which happens to be its biggest holding) moving up toward its November high, and well above moving average lines. Its relative strength ratio (top of chart) is near a new high. Chart 3 shows Vertex (sixth biggest holding) hitting a new two-month high. Its relative strength ratio is doing the same. Chart 4 shows Amgen (second biggest holding) moving back above its 200-day average. Its relative strength line is rising as well.
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Chart 2
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Chart 3
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Chart 4
RISING BOND YIELDS BOOST LIFE INSURERS... Several messages have explained that rising bond yields are good for financial stocks like banks and life insurers. And both groups have been doing much better of late. I've shown the strong bank action before. I'm going to focus on life insurers today. The daily bars in chart Chart 5 show the Dow Jones US Life Insurance Index rallying today after bouncing off its 200-day moving average. Its relative strength line (just above chart) turned up since October when bond yields started rising. Notice the close correlation between the life insurance/ SPX ratio and the 10-year Treasury Yield (green line) over the last year. They show that the insurance group does better when yields are rising. That's because most of their premium income is invested in fixed income. Higher yields mean higher income down the road.
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Chart 5
AFLAC AND PRUDENTIAL ARE INSURANCE LEADERS... Chart 6 shows Aflac (AFL) very close to a major bullish to a new record high. It has one of the strongest insurance charts. Its relative strength line (above chart) has already broken out. Chart 7 shows Prudential Financial (PRU) trading well above its moving average lines and nearing a test of its November high. Its relative strength line (top of chart) is rising as well (along with bond yields).
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Chart 6
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Chart 7
S&P 500 TRIES TO REGAIN 200-DAY LINE... Chart 9 shows the S&P 500 Large Cap Index trying to regain its 200-day line after bouncing off chart support along its September high (and near its 50-day average). A decisive close back above that long-term support line would be a positive development. To signal a stronger trend, however, smaller stocks need to start participating as well. Chart 9 shows the S&P 600 Small Cap Index ($SML) bouncing off its 50-day average, but well below its 200-day line. The first attempt at that line a couple of weeks ago failed. The market will look a lot stronger when large and small cap indexes are all trading back above their 200-day lines.
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Chart 8
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Chart 9
COMPARISONS WITH 2011... Along with other analysts, I've pointed out several times the close comparison between this year's stock market correction and the last one that took place in 2011. Both peaked in May and bottomed in October. After a strong October, both pulled back during November. That's where we are now. The big question is whether or not the market resumes its major uptrend as it did near the end of 2011. In looking for clues, I found the following two charts very interesting. The red line in both charts measures the percent of NYSE stocks above their 200-day averages. Chart 10 shows the red line forming a double bottom between August and September of this year before rising to 40% during October. It has pulled back in November to 27%. Chart 11, however, shows that the $NYA200R is at almost the exact spot it was at this point in 2011 (see circle). After rebounding to 40% in October 2011, it pulled back below 20% that November. From there, however, it started rising and broke through its October high at 40% near the start of 2012 (when stock indexes resumed their major uptrend). The message from the two charts is that we were in the same place four years ago and things turned out okay. The key this time will be whether or not the red line exceeds its October high at 40% the way it did then. Historical comparisons take only us so far. The market still has to prove that it's strong enough to repeat its bullish performance of four years ago.
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Chart 10
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Chart 11
S&P 500 EQUAL WEIGHT ETF LAGS BEHIND... Another way to measure the broadness of the market rally is by charting the Guggenheim S&P 500 Equal Weight ETF (RSP). The RSP includes the same stocks as the S&P 500, but doesn't weight them. Each stock is given equal weight. As a result, smaller stocks carry as much weight as larger stocks. Chart 12 shows the RSP bouncing off its 50-day average, but still well below its 200-day line. While it would be encouraging to see the market cap weighted S&P 500 Index (which gives greater weight to large caps) clear its 200-day line and November peak, it would be even better to see its equal-weighted version do the same.
