Chart Advisor: Health Care Rebounds

Investopedia

Contributor:
Investopedia
Visit: Investopedia

By J.C. Parets & All Star Charts

Thursday, 8th September, 2022

1/ Health Care Rebounds

2/ Stocks Hold the Line

3/ Rates and Stocks Diverge

4/ Gold Still Has Value

Investopedia is partnering with All Star Charts on this newsletter, which both sells its research to investors, and may trade or hold positions in securities mentioned herein. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice.

1/ Health Care Rebounds

Health care stocks led a broad rally today as the major averages appear to have found a floor following the August selloff. We discussed the potential top in the Large Cap Health Care Sector SPDR (XLV) last week. For now, buyers are still defending the lower bounds. 

When we move down the cap scale and look at small cap health care stocks (PSCH), there is a lot more weakness. Notice how a top was completed late last year. This was actually one of the first sector indexes to break down during the current cycle. 

Source: All Star Charts, with data provided by Optuma

Small cap health care is currently trapped beneath overhead supply at the 2018 highs. This level acted as support, albeit briefly, during the first quarter. We’ll find out soon whether it will turn into resistance or not. 

2/ Stocks Hold the Line

Markets have experienced a high degree of turmoil in the last year and a half. As a result, sellers have remained in full control, and many indexes and sectors find themselves below overhead supply.

However, when we zoom out and put things into context, we can see that some structural support levels are still intact.

As you can see in the chart, the Value Line Geometric Index is currently holding above a polarity zone that coincides with former highs from two decades ago, making it a critical level of interest. This index represents the median stock performance and is an excellent way to view how the overall market is doing.

Source: All Star Charts, with data provided by Optuma

If VLG can find real support here, markets are not falling apart. On the flip side, if the median stock can’t hold these levels, the structural trend for equities would be broken, and we could expect further selling pressure for stocks and risk assets.

3/ Rates and Stocks Diverge

U.S. yields and the small-cap value/small-cap growth ratio tend to go hand in hand. The chart below illustrates how closely these two have moved together during the last twelve months.

Source: All Star Charts, with data provided by Optuma

As rates have risen, cyclical and value sectors have enjoyed steady leadership. This ratio is a great gauge to support or contradict what we see in the bond market.

More recently, it’s showing a divergence as yields press higher, and the value/growth ratio has not been able to follow and confirm the price action. If this is a sustainable rally in rates, we would expect value stocks to pick it up and start outperforming.

4/ Gold Still Has Value

U.S. Treasury yields and breakeven inflation rates continue to creep higher. While gold has not been the best inflation hedge during the past couple of years, it does have a tendency to signal the prospect of inflation. It was the first commodity to start rallying in 2019. That was a full year ahead of the rest of the commodity space.

Source: All Star Charts, with data provided by Optuma

Fast forward to today, and gold is on the verge of breaking down from a two-year consolidation. If gold breaks down to fresh multi-year lows, it would be an indication of easing inflationary pressures on the horizon.

That would throw a wrench in the commodity bull run and could dampen the rotation into cyclical areas of the market. 

Originally posted 8th September, 2022

Disclosure: Investopedia

Investopedia.com: The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy.  While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. This information is intended for US residents only.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Investopedia and is being posted with permission from Investopedia. The views expressed in this material are solely those of the author and/or Investopedia and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: ETFs

Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing.  Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.