by Pinchas Cohen
The S&P 500 Index made yet another record close yesterday, its 46th of the year. But before we take all that cash we've got sitting on the sidelines and go all-in stocks, perhaps we're best off taking a deeper look.
To appreciate the latest record, check which sectors led the index and which were deadweights. That would provide a clue to the internals of what exactly happened yesterday when the SPX pushed higher.
Sector Leaders and Laggards
Yesterday’s rally was driven by a clear leader, the Health Care sector (Health Care Select Sector SPDR (NYSE:XLV)), which gained 1.34 percent on the day. Utilities, in second place, was way behind, with a gain of less than half, at 0.59 percent. That’s it.
Energy and Consumer Discretionary were in third and fourth places respectively with meager 0.06 percent and 0.05 percent moves, less than the actual 0.07 percent gain of the total index.
The usual growth sector suspects, led by Technology and Financials, were even more anemic—0.00 percent and -0.53 percent respectively. Yesterday, in fact, they were pulling the index down, minimizing the benchmark’s gain.
To better appreciate yesterday’s sector behavior, it helps to have a yardstick. So, let’s compare it to longer timeperiods.
During the last week, Real Estate led rallies with 1.05 percent gains, followed by Technology with 0.93 percent. During the past month, Financials gained the most, up 5.65 percent, followed by Energy (+3.78 percent) and Materials (3.73 percent higher).
Over the last 3 months, Technology was the leader, higher by 6.77 percent, followed by Financials (+5.35 percent) and Materials (up 5.06 percent). During the last 6 months, Technology moved higher by 14.89 percent, followed by Materials which were up 12.54 percent.
Finally, over the last year, Financials came out on top, with 35.39 percent gains, followed by Technology, up 28.45 percent, Industrials which were 26.05 percent higher and Materials, +25.45 percent. Over five different periods, including as far back as one year, growth stocks were the clear winners. Yesterday’s painfully clawed out record—led by defensive sub-indexes—is the exception to the rule for this second-longest-ever bull market.
Time To Get Defensive?
While the Dow Jones Industrial Average advanced a more respectable 0.18 percent, it had another problem. It pushed against the 23,000 milestone but acted like it hit a brick wall. Bulls twice tried to pretend it wasn’t there and got smacked down both times. And each time the effort lasted under a minute. That suggests a lot of sell orders were placed at that psychological round number, creating a resistance to any further upmove.
Both situations, the S&P crawl led by defensive sectors, and the Dow's inability to stay above the key level for even a full minute, may suggest it’s time to assume a defensive posture.
After having established that defensive stocks led yesterday’s advance, holding up an average that included deadweight growth stocks, let’s address the reason Health Care in particular was the clear leader.
One word: Trump. He appears to support a short-term deal to stabilize the healthcare markets. And no one likes to stabilize a market more than traders, especially if there are profits involved.
However, given previous efforts at healthcare reform by this administration, perhaps it wouldn’t be prudent to rely on what the White House would or would not do. Either because the President is impulsive and indecisive or because he’s a 'genius' negotiator, after he signaled he would be willing to extend cost-sharing reimbursements for two years, the White House seemed to renege on that statement. As well, leading Senate Republicans were hazy on the subject, and unless Senate Majority Leader Mitch McConnell brings it to the floor for a vote, it’s going to be nothing more than speculation at this point.
So, how to trade?
On September 7th, XLV decisively broke through the $81 resistance level. Accordingly, the psychology reversed, turning it into a support area. On that support area developed a continuation pattern by the name of Symmetrical Triangle.
The triangle bottom represents buyers and is therefore a support line, and the triangle top represents sellers and is therefore a resistance line. Notice that while the price peaked above the triangle top resistance yesterday, it closed lower, beneath the former October 6 peak, a bearish Shooting Star that confirmed the preceding bearish Hanging Man. There is significant resistance at this price level, which is created by sellers just as eager as the buyers. Hence, the triangle is symmetrical.
Trading Strategies
Conservative traders would wait on a long entry for a decisive upside breakout, employing a 3-percent filter, then wait for the more-often-than-not return-move and confirmation the pattern remained intact, when the price closes higher.
Moderate traders may wait for a somewhat less decisive upside breakout, employing a 2-percent filter, then wait for the return move, with or without confirmation of the pattern’s integrity.
Aggressive traders may wait for just a 1-percent filtered breakout. That would also limit the need to wait on a return move, as this entry would be closer to the pattern’s support. Alternatively, aggressive traders may go for a long on a return toward the bottom of the triangle. They, then have the choice to place a close stop-loss and a proportionately closer take-profit exit under the top of the triangle, or hang on through the likely volatility that is to follow, on the probable chance of an upside breakout.
Very aggressive traders may actually short, with a close stop-loss above yesterday’s $83.83 high on the chance that the price may fluctuate, going down toward the triangle bottom, before it may break out on top – or even hang on for a possible breakdown, after bringing the stop-loss closer, to ensure no loss or even a small profit.
Amateur traders will shoot first and ask questions later. Hopefully, they won’t get hit by a ricochet.
Target
A triangle’s target is measured by its height. The top of the triangle is $83.41, registered on September 13; the bottom is $80.83, registered on September 27. That makes the height $3.42, counted from the point of breakout, not the triangle top. For example, if the point of breakout (the angle of the triangle from which the decisive (according to the filter) breakout took place would be $83.00, then the target would be $86.42.