SPX pullback should prove short-lived;  Healthcare deserves an Overweight

Mark L. Newton, CMT

SPX and QQQ look to have begun minor pullbacks with Wednesday’s decline, which happened during a significant week of FOMC meeting, “Magnificent 7” earnings as well as cycle confluence.  However, technically I expect a US Equity pullback to prove short-lived at this time before suggest prices pull instead back to new highs.   Defensive strength has been apparent for the last week, and Healthcare ETF $XLV nearly made a new monthly all-time high close as January came to a close.   Minor weakness in Technology and Industrials should be buyable, while Industrials and Healthcare play “catch-up”.  US Dollar and Treasury yields have shown some minor decoupling from SPX in recent weeks, but expect that both should turn back higher into February/March, which will be important to monitor in terms of duration and velocity. Overall, Equities should be entering a choppy period in February, which tends to be seasonally a worse month than Januarys during Election years.  However, as discussed prior, SPX requires a close back under 1/12/24 peaks arguably to have even short-term concern. (SPX-4802.40).  Upside resistance could materialize in the short run at 4937-4995.

Overall, I suspect that this week’s drawdown should prove temporary and prove short-lived.  SPX likely should hold 4800 and turn back higher towards 4950-5000 into mid-February.  Below are some summary comments to blend the short-term with some intermediate-term thoughts as January has come to a close.

  1. Technically stock market pullback should prove temporary for now, bottoming 1st to 2nd week in February, but a larger decline is possible sometime from March into April/May before an intermediate-term bottom (5-7% in magnitude).
  2. I am bullish for 2024, my target is 5175 which (similar to Tom Lee’s thinking) might prove low. My work suggests that Treasury yields likely start a larger period of decline from March into August which should coincide with a more broad-based stock market rally.
  3. Technology and Industrials are my two preferred groups to overweight, but Financials and more recently healthcare have begun to come to the rescue, which is a good sign for US Stock indices. as these are 2nd and 3rd largest sectors by size within SPX.  Energy is a work in progress, but should bottom sometime in February and turn higher in a seasonally bullish period.
  4. Lots of technical warning signs about breadth erosion and Technology carrying most of the load, which are true.  However, there’s no guarantee that Tech needs to decline.  The rest of the market could simply play catchup.
  5. Market volatility is happening SPECIFICALLY because the Fed is not on the same page as the Dot plot and there remains inconsistency towards when and how many cuts will appear.
  6. Healthcare barely missed logging its best all-time high close in finishing January above December 2021’s close.   This sector has been playing catchup to Financials which is a positive.
  7. Small-cap and China rallies have failed thus far- Both of these could work at some point this year but largely should depend on rates turning down more meaningfully.  Evergrande liquidation could kick off others that result in true capitulation and good buying opportunity for China/Hong Kong.
  8. Generally it’s tough fading markets that are at new all-time highs (SPX and QQQ) though the broader market is certainly NOT at new all-time highs when one looks at Value Line, Equal-weighted SPX.. etc, so I expect a period of broad-based catch-up might prove to materialize between Spring 2024-Fall 2024.
  9. January finished positive in SPX by +1.5%... however, Equal-weighted SPX, DJ Transports, Russell 2k, Mid-cap 400 were all fractionally negative.
  10. Emerging markets will be under pressure until US Dollar turns back lower.  At present, I suspect another bounce in both Dollar and rates will get underway and Emerging Markets (EM) will suffer a bit more.  However, India, Lat Am look best.
  11. Sentiment did improve meaningfully from October into December but has begun to retract a bit and the combination of this being an “ELECTION YEAR” with no one happy and 2 wars with concerns over the economy, Open border, could keep sentiment muted.  This has little to nothing to do with stock market normally and results in a “Wall of worry” which is normally quite positive for US Stocks.
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Mark L. Newton, CMT
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