DOW HITS SEVEN-MONTH HIGH WHILE THE REST OF THE MARKET LAGS BEHIND -- HEALTHCARE HAS BECOME A MARKET LEADER
DOW CONTINUES TO LEAD... The market ended the Thanksgiving week with the Dow gaining ground on Friday while the S&P 500 and and Nasdaq ended the day lower. For the week, all three gained ground with the Dow in the lead and the Nasdaq turning in the weakest performance. That trend is symptomatic of market performance over the past couple of months with the technology sector holding the Nasdaq and S&P 500 back; while money has rotated out of technology (and economically-sensitive consumer discretionary stocks) and into defensive stock groups like staples, utilities, and healthcare (more on that shortly). Money has also been flowing into industrials, financials, and materials.
Chart 1 shows the Dow Industrials rising above their August peak to reach the highest level in seven months. The other two major indexes lagged behind. Chart 2 shows the S&P 500 gaining ground on the week but remaining below its 200-day moving average -- and well below its August high. That paints a much weaker market picture. Relative weakness in technology stocks is one of the major factors holding the SPX back. That weakness in also reflected in much weaker performance by the Nasdaq market. Chart 3 shows the Invesco QQQ Trust still trading below its 100-day moving average (green line) and even further below its 200-day line. While this week's upside breakout in the Dow Industrials is encouraging from a charting standpoint, the fact that the other major stock indexes are lagging so far behind the Dow has kept the market's major downtrend intact and warrants a continuing cautious market view.
SEASONAL BUYING... Stocks are also being supported by traditional seasonal yearend strength which could contribute to the usual Santa Claus rally. Stocks, however, could run into more trouble in the new year once seasonal strength has run its course. That cautious outlook may help explain why investors are buying defensive healthcare stocks.
HEALTHCARE SPDR MAY HAVE BOTTOMED... The message from October 28 suggested that the healthcare sector offered investors a defensive market sector with upside potential. It also suggested that the sector might be bottoming. Chart 4 shows the Health Care SPDR (XLV) clearing its summer peak to reach the highest level since April. Combined with its two lows formed during June and October, the chart has taken a more bullish look. The October message also suggested that biotechs were looking stronger. Since then, they've been the strongest part of the XLV. Chart 5 shows the Nasdaq Biotechnology iShares on the verge of clearing their August high. Two important features in favor of healthcare is its relatively strong chart pattern and the fact that it offers defensive protection in a dangerous economic environment.
