FINANCIALS LEAD FRIDAY'S STOCK BOUNCE -- SO DO SMALL CAPS AND TRANSPORTS -- HEALTCHARE IS WEEK'S STRONGEST SECTOR -- HCA HOLDINGS ACHIEVES BULLISH BREAKOUT -- AMGEN SURGES
DOW AND S&P 500 END WEEK ON A STRONG NOTE ... What started off as a soft week for stocks ended on a strong note. Friday's gain was enough to keep stock indexes basically flat for the entire week. But there was some improvement on the charts. The daily bars in Chart 1 show the Dow Industrials jumping 186 points (0.94%) on Friday. That was more than enough to keep it well above its 50-day average and chart support along its January low. Also encouraging was its 14-day RSI line (above chart) bouncing off the 50 level for the second time since mid-January. That's usually a sign of a market that's consolidating rather than correcting. The only soft note on Friday was volume, which didn't match the price gains. The S&P 500 also saw improvement. Chart 2 shows the SPX jumping 16 points (0.73%) on Friday. If you look closely at the circled part of the graph, you can see a bullish short-term pattern called an "island reversal". That pattern is formed when a "gap down" (red arrow) is followed within a few days by a "gap up" (green arrow). That pattern usually signals higher prices. My Thursday message expressed concern that the two MACD lines for the SPX had yet to turn positive. The box on top of Chart 2, however, show the two MACD lines converging for the second time in two weeks. It wouldn't take much to turn them positive. Also encouraging was the fact that financials led Friday's rally. So did small caps and transports.
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Chart 1
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Chart 2
FINANCIALS BOUNCE OFF CHART SUPPORT... The daily bars in Chart 3 show the Financial Sector SPDR (XLF) gapping 2% higher on Friday. And it did so on rising volume. The XLF has been trading sideasys since the second week in December. During those eight weeks, the XLF has bounced twice off its 50-day moving average. Friday's upside gap suggests another attempt to break out of its trading range. The XLF/SPX ratio (top of chart) fell from early December into mid-January. It has since formed two rising bottoms and ended the week on a strong note. Renewed leadership by financial stocks would give an added boost to the stock market. Banks and brokers led the sector higher. The move to scale back Dodd-Frank is good for banks, while the postponement of a new fiduciary rule for investment advisors is potentially good for brokerage stocks. Bond yields bounced on Friday as well. Rising bond yields are good for financials. A strong job report may have also contributed to higher bond yields and the buying of stocks.
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Chart 3
SMALL CAPS SHOW NEW LEADERSHIP... Small cap stocks (which are more responsive to a stronger domestic economy) also led the post-election rally in stocks. Chart 6, however, shows the rally in the Russell 2000 iShares (IWM) stalling in early December and trading sideways since then. The IWM/SPX ratio (top of chart) also declined during those two months. Friday's 1.5% gain, however, outpaced gains in large caps. As a result, the small cap/large cap ratio may be starting to recover. That would be a positive sign for them and the market as a whole. The daily bars show the IWM ending the week on a strong note after bouncing again off its 50-day line. To turn its trend higher again, however, the IWM needs to clear its late January intraday peak at 137.55.
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Chart 4
TRANSPORTS ALSO BOUNCE OFF SUPPORT... Chart 5 shows the Dow Jones Transportation Average climbing 138 points (1.5%) on Friday, which made it one of the day's strongest groups. Chartists watch the transports closely for signs of confirmation or divergence from the Dow Industrials. It's better when both are moving in sync on the upside. Transports hit a record high in December which put them in step with the Dow Industrials. The January peak in the transports, however, failed to confirm a record high in the Dow. Friday's bounce kept the TRAN above chart support at its January low and its 50-day average. Transportation stocks are very sensitive to the signs of strength in U.S. manufacturing because they move the raw materials to factories and products to market. Friday's bounce was an encouraging sign for them and the market.
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Chart 5
HEALTHCARE IS WEEK'S STRONGEST SECTOR... A month ago (Saturday, January 7), I wrote about healthcare being the week's strongest sector. And here we are again writing about the same thing. Why that may be noteworthy is that healthcare has been one of the market's weakest sectors over the past year. The daily bars in Chart 6, however, offer some encouragement. The two converging trendlines drawn on the Health Care SPDR (XLV) have the appearance of an "ascending triangle" which is usually a bullish pattern. [The ascending triangle is identified by a flat upper line and a rising lower line]. Biotechs and pharmaceutical stocks rebounded this week. But bigger gains have come from medical equipment and supplies, as well as healthcare providers (more on that shortly). The January 7 message showed an upturn in biotechs. My January 12 message showed upturns in Anthem, Cigna, and Boston Scientific. This Thursday's message added IDEXX Labs and Merck, but suggested that healthcare provider HCA Holdings might be the next one to break out. Let's start there.
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Chart 6
HCA HOLDINGS BREAKS OUT... Healthcare Providers had a good week. Anthem (ANTM) hit a two year high. Chart 7 shows HCA Holdings (HCA) rising to the highest level since 2015. Cigna also hit a 52-week high. That may have something to do with the expected repeal of Obamacare. Chart 8 shows Amgen (AMGN) surging 5% on Friday to a four-month high to give a boost to the biotech sector. Although most healthcare attention is given to biotechs and big pharma, that's not where that sector's leadership lies. Fortunately, there are ETFs that allow participation in stronger groups.
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Chart 7
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Chart 8
STRONGER HEALTHCARE ETFS... Chart 9 shows the S&P Health Care Equipment SPDR (XHE) nearing a test of highs formed last autumn. It's close to a record high. Chart 10 shows U.S. Medical Devices iShares (IHI) also trending higher. Finally, Chart 11 shows U.S. Healthcare Providers iShares (IHF) nearing a test of last summer's high. If I were looking to invest in the healthcare sector, I'd be choosing from among those three sector leaders.
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Chart 9
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Chart 10
