Biotech Lag: The XBI which many think of the "equal weight" biotech ETF as its top holding is less than 2% of the fund (by contrast the IBB's top 5 holdings account for nearly 30%). On a one-year lookback time frame, the XBI is lower by 33%, while the IBB which is comprised of the larger, more recognizable names is down just 14%. But on the chart below these higher beta plays in the XBI could be due for a bounce. A good risk/reward situation is setting up here with round number theory coming into play with a nice CLOSE Friday above par (use a CLOSING stop of 95 on the XBI). The bulls, not many left, should be encouraged by not only the bullish candlesticks last Monday and Friday, but the volume that backed it up. One could say it felt like capitulation as WEEKLY volume last week was the heaviest since the big overall markets lows in early 2020. Am I saying this ETF can rise to highs near 175 (which it did in February 2021), following that dramatic bottom made in March 2020? Of course, we will only know in retrospect, but the group is likely to catch some bids here, and let us look at some names that can benefit.
Is 2022 Year Energy Breaks The Curse? We frequently mention the pic here of how energy has a tendency to lag other major S&P sector peers, after a year that it was the best actor of 11. In 2007 and 2016 it was the best behaved, and notice the following year it was negative as 2008 fell 35% and 2017 lost 1%. Of course, 2021 was a stellar year for the group with the XLE jumping 46%. Will this be the year where it can back it up with another solid performance in consecutive years? Perhaps as many may not be positioned for that, and the space is still hated by many (political pressures and bank lending to energy names is seen as politically risky too, thanks Will), and it still represents a very small fraction of the S&P. Below is the chart of the XOP and since late November has been reluctant to remain above the very round par number. I think the trend is your friend and energy will surprise and continue its upward ascent. Look for CVX to dominate XOM as well, as it currently trades just 2% off most recent 52 week highs, as XOM is now 8% below its own. On its WEEKLY chart, it has the look of a bull flag with a move above 120 carrying a measured move of nearly 30 handles. That will have a dramatic impact on the entire space, and many will be lifted by that possible rising tide.
Technical Irrelevance: Sometimes technical analysis does not matter (Petr Pinkhasov quote this week), and I am a die-hard technician. That goes for fundamental work too in the current market environment where margin clerks could be very busy in a December month that they may not be accustomed to. With many caught mentally "offside" looking for a year-end rally institutions could be scrambling to unwind their previous stance, and that could further "unnerve" benchmarks. Of course, this applies to individual names more so as they can crater 30-50% where the indexes will lose 3-5%. Sure I am throwing numbers out there, but technical damage has been severe recently. Below is the chart of the Nasdaq as warning signs should have been put up with the big reversal on 11/22 with a bearish engulfing candle at all-time highs and quickly negating a bull flag breakout at the very round 16000 figure (our previous target originally in our 6/25 Technology Note). It held the 15000 number Friday, but the action has been wide and loose, hallmark bearish traits. I would have preferred tauter and less velocity in the move toward 15000.
David Versus Goliath: An abundance of chatter has been made about the consolidation within the small-cap arena. On a very general basis, the IWM has gone virtually sideways since February. In the consumer discretionary arena, there is some divergence occurring in regards to the larger cap, more top-heavy, XLY to the "smaller cap", more equal weight XRT. While the XLY is right at all-time highs and on a very impressive 4 week winning streak, the XRT trades 5% off its 2021 peak, and this week the difference was glaring with the XLY higher by 4.3%, and the XRT falling fractionally. TSLA, on a current 10 week winning streak, recently joined the exclusive trillion market dollar cap club (just 5 others including MSFT GOOGL AMZN AAPL and Aramco) by jumping 22.5% this week, it's second-best WEEKLY gain behind the 24.7% gain the week ending 1/5. Expect the psychological very round 1000 figure to be supportive going forward, if retested. AMZN recorded a 100 handle reversal intraday to CLOSE at highs for the session Friday after an ill-received earnings release. While the two aforementioned names dictate the vast majority of the action in the XLY do not discount how HD is doing, falling just 4 sessions in all of October. NKE and TGT, other top 10 holdings are quickly building the right side of their cup bases. The latter completed a handle Friday. Advantage large caps.
Relative Performance: Not surprising to see weakness on ratio chart against S&P 500 for the staples. It is the "worst" actor among the 11 major S&P sector groups up just better than 7%. The XLP is now 4% off most recent 52 week highs, and top component in PG could have ETF feeling heavy as chart is sporting bearish top pattern.