BIOTECH ISHARES NEAR UPSIDE BREAKOUT -- TWO SMALLER BIOTECH ETFS HAVE ALREADY BROKEN OUT -- TEN YEAR TREASURY YIELD THREATENS 2017 LOW -- SMALL CAPS ARE STARTING TO WEAKEN
BIOTECH ISHARES NEAR SEPTEMBER HIGH... I've been writing about the recent upturn in the healthcare sector. And that the rally was being led higher medical device and equipment stocks, as well as health insurers. Biotechs and pharmaceuticals have lagged behind. Chart 1, however, shows the Nasdaq Biotechnology iShares (IBB) trading at the highest level five months and nearing a challenge of its September intra-day high at 301.61. A decisive close above that chart barrier would represent a bullish breakout. The IBB is the largest, and most liquid, of the biotech ETFs. A couple of smaller versions have already achieved bullish breakouts. Chart 2 shows the S&P Biotech SPDR (XBI) already trading at a new 52-week high. Chart 3 shows the VanEck Vectors Biotech ETF (BHH) doing the same. The upside breakouts in those smaller ETFs increase the odds for a similar move by IBB in Chart 1. That would broaden out the uptrend in the healthcare sector.
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Chart 1
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Chart 2
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Chart 3
TEN-YEAR YIELD THREATENS SUPPORT... Treasury bond yields peaked in mid-December and have been trading sideways since then. The daily bars in Chart 4, however, the 10-Year T-Note yield (TNX) threatening the lower end of its 2017 trading range. The pullback in yields has been accompanied by a rebound in bond prices, along with bond proxies like staples and utilities. My Thursday message showed the upturn in both defensive groups. I suggested their new popularity might be a sign that investors were turning more cautious about the stock market, which is in an overbought condition. Relative weakness in cyclicals and tranports were cited as possible concerns as well. We can add small caps to that list of recent laggards.
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Chart 4
RUSSELL 2000 SMALL CAP INDEX LOOKS TOPPY... It's usually not a good sign for the market when small caps are lagging behind. Chart 5 shows the Russell 2000 Small Cap Index ($RUT) in danger of rolling over to the downside. Its 14-day RSI line (top of chart) has formed a negative divergence (blue arrow) and is in danger of falling below its 50-line. The solid red line plots a ratio of the RUT divided by the S&P 500. The small cap/large cap ratio has fallen to the lowest level since November. That's another way of saying the market breadth is weakening, which may warn that an over-extended stock market could be due for some profit-taking.
