Sector Detector: Healthcare Making Post Election Surge IYH
by Scott Martindale
The resolution of uncertainty last week around the elections and FOMC announcement allowed the market to release some pent-up energy and finally break out of its consolidation pattern. After the normal head fakes in both directions, it rallied hard such that the S&P 500 reached a 2-year closing high. The Republicans took over leadership of the House, which will assuredly bring a measure of gridlock back to the political scene, and many market observers think the market prefers that. I said in last week’s column that I was expecting a significant market move one way or the other, and indeed we saw a nice little jump.
Although, the GOP victories were likely welcomed by the market, it is more likely the $600 billion QE2 that is bringing joy to Mudville. The Fed has stated that it will continue to do its part by pumping money into the system through “quantitative easing” (i.e., printing of money to buy back Treasuries from the primary dealers who then use the money to buy equities and commodities). Any other country would endure hyperinflation if they did such a thing, but the U.S. can get away with it because the global economy still depends on the American consumer and a healthy U.S. economy to thrive. The dollar has actually been strengthening since the FOMC announcement.
It continues to intrigue me how closely the chart pattern for the past 3 months is matching up to the 3-month timeframe at the beginning of the year that culminated in the May selloff. You can see in the chart that mid-January through mid-April produced a very similar Price and MACD pattern to what we have seen since early August. After a sustained bullish run coming off a bottom at SPY 105, both periods came to a multi-week price consolidation zone with a lengthy period of overbought MACD, followed by another brief surge and consolidation. The current MACD tried once to crossover bearishly, and is now trying again – just like its behavior in mid-April. Also take note of the 20-40 moving average lines. If history is to repeat, it should happen by early December.
The charts have been repeatedly flashing signs of an imminent trend change for the worse, but the macro story is somewhat different now than it was in April, and with the Fed’s support, the bulls just won’t let it happen. Every apparent start to the much-needed correction is quickly bought and turned into yet another head-fake that squeezes the shorts.
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