SMALL CAPS LEAD MARKET LOWER -- S&P SHOWS NEGATIVE DIVERGENCE -- THAT INCREASES THE ODDS THAT THE DOW WON'T REACH 20K ON THIS ATTEMPT -- HEALTHCARE SPDR SELLS OFF ON TRUMP DRUG COMMENTS -- BUT HEALTH CARE PROVIDERS ANTHEM AND CIGNA LOOK STRONG
SHORT-TERM MARKET TREND WEAKENS... It looks like the Dow probably won't reach the 20K on this attempt. That's because of weaker market action in other stock indexes. Chart 1 shows the S&P 500 SPDR (SPY) starting to roll over to the downside after touching a record high last week. Unfortunately, that price high wasn't confirmed by the 14-day RSI line (top of chart) which has formed a pattern of "lower highs". That negative divergence between the two suggests that the SPY will most likely retest its late December low near 222.73. Daily MACD lines for the SPY (below chart) also remain negative. Small caps look even worse. Chart 2 shows the Russell 2000 iShares (IWM) already undercutting its December lows. Since small caps usually lead large caps, that's a negative sign for the market's short-term trend. The market's weakest sectors are industrials and financials which have been market leaders. At the same time, defensive groups like staples and utilities are holding up better. That also suggests a more defensive tone in the market. Bond prices are bouncing from an oversold condition. Falling bond yields are pulling the dollar lower. That's giving a boost to gold and other commodities. Gold benefits when the dollar and yields are dropping. Keep in mind, however, that these are short-term counter-trend moves. The longer range trends of bond yields and the dollar are higher. And despite today's selling in stocks, their long-term trend is still up. The market's post-election rally has been stretched. It's probably in need of a pullback. Stock indexes remain well above their 50-day moving averages. A pullback isn't necessarily a bad thing.
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Chart 1
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Chart 2
HEALTHCARE SPDR SUFFERS TRUMP SETBACK... My weekend message suggested that money was starting to flow back into healthcare stocks, and biotech stocks in particular. As you're probably aware, biotechs and big pharma stocks got "Trumped" yesterday regarding the price of drugs and sold off sharply in heavy trading. That hurt the healthcare sector. Chart 3 shows the Health Care SPDR (XLV) pulling back sharply from a test of its November high around 71. Not all healthcare stocks are the same, however. Health care providers are actually holding up pretty well (which is likely tied to hoes for a repeal of Obamacare).
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Chart 3
ANTHEM AND CIGNA LEAD HEALTH CARE PROVIDERS ... Healthcare providers are having a relatively good day. In fact, they're the strongest part of the healthcare sector. Two standout performers are shown below. Chart 4 shows Cigna (CI) rising to the highest level in six month. It appears headed for a test of its July peak. Chart 5 shows Anthem (ANTM) on the verge of a bullish breakout that would put the stock at the highest level since the summer of 2015. In the drug group, Merck (MRK) and Lilly (LLY) are up for the week. So is medical equipment stock Boston Scientific (BSX). Chart 6 shows the stock surging to a three-week high. I point these stocks out to make the point that the healthcare sector includes a lot more than biotech and drug stocks. And some of them are doing quite well. It pays to look beneath the surface in healthcare.
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Chart 4
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Chart 5
