Waves transfer energy, not matter, meaning that water can bob up and down without moving side to side because it's riding on a wave of energy. They have crests and troughs, and a wave's height is the distance from trough to peak.

When we think about a surfer escaping a crashing wave, we might be missing something. It's what's going on underneath the wave that matters. Waves don't collapse until they reach depths of 1.3 times their height. It's when waves get to shallow water that they tumble forward and trip. But don't let that fool you – waves can be very powerful. A typical tsunami length is 100 times its depth. So, a 13,200-foot-deep wave can travel 440 miles per hour – about as fast as a commercial jet.

Markets are cyclical – like waves in a pool. A lot of little waves mostly move together. When all waves move together, they can slap up over the top of the pool, sometimes enough to knock over something important, like a wine glass. (This is an adult pool we're talking about.) That's like when the whole market falls – all sectors move more-or-less in tandem downward, and the collective energy is amplified. Sectors also can crest and trough individually. Let's look at what's crashing around the pool of the S&P 500.

Value won this short week in a small-scale rotation. Investors moved capital out of growth and small caps into "safer" perceived stocks such as those in the Dow Jones Industrial Average – the best performer of the big four indexes. The Russell 2000 was down 1.2%, and the S&P 500 finished slightly lower. The NASDAQ was slightly higher, largely due to semiconductors.

When we look at the individual sectors, it's clear that growth continues. Information technology, industrials and consumers were all up nicely. Again, the PHLX Semiconductor Index was having a week, posting a +4% performance for a total gain of 45.7% since Christmas. That's a gain of 0.39% per day including weekends. Remember, we're not talking about a single stock, but an index of 30 of them! Let's put that into perspective: if you bought a $500,000 house on Christmas Eve, at the same growth rate, your house would be worth $655,000 today and nearly $3.6 million five years after the day you bought it.

Moderate market pain points were localized to real estate and utilities. These are rate-sensitive securities and are often chucked aside when growth is in the air. Real estate shed 3.2%, and utilities lost 1.6%.

Performance of major indexes over past week and since Dec. 24 lows
 FactSet

Health Care's Cause for Gauze

And then there was health care. The wave crashed. Last week saw a bludgeoning of the S&P 500 Health Care Sector Index of -4.39%. It's the weakest performing index since Christmas and the whipping boy for right now.

But do you recall when Hilary Clinton came out and said she had her eye on health care around August 2015? The sector got pounded, only to come back swinging, and I believe that this is a similar setup. One underlying story is that health care will be a big issue for the upcoming election. Democrats will push for Medicare for All, and Trump is openly against the "thievery of big pharma." The news cycle paints a lose-lose situation for health care companies.

Health care saw unusual selling in approximately 30% of the stocks we track last week. It's a clear outlier, and the story makes sense.

Unusual institutional (UI) signals by sector
www.mapsignals.com 

Stories are nice, but we live in a data-driven world. Selling ripped through health, but I noticed that, while the sector is scoring very weakly technically for us, telecom is still a much weaker sector in terms of fundamentals. We looked at prior times of intense health care selling and what that meant for forward returns. Based on the findings, there is cause for pause and gauze.

Wednesday's data alone showed that over 28% of our health care universe returned an unusual institutional (UI) sell signal. To put this rare event into perspective:

  • Year to date, before Wednesday, the daily average percentage of health care stocks showing UI sell signals was 1.52%.
  • Going back to 2013, including Wednesday, there have been only 14 trading days where 25% or more of our health care universe has shown UI selling.

Below are all days where 25% or more of our health care universe saw unusual selling since 2013. At first glance, there tends to be more days of extreme selling after the first day of big selling. This indicates more bumps ahead.

Days with unusual selling in health care
www.mapsignals.com

Extreme selling days are rare, but while the average forward return for health care is inconclusive, it's not strong. However, one thing I know is that people won't stop getting sick. When the rotation is over, there will be great bargains.

Before you worry about the state of health care tomorrow, "Remember, today is the tomorrow you worried about yesterday." – Dale Carnegie

The Bottom Line

We (Mapsignals) continue to be bullish on U.S. equities in the long term, and we see any pullback as a buying opportunity. Health care stocks saw immense selling last week, suggesting that the near-term trend is likely range bound.

Disclosure: The author holds no positions in any securities mentioned at the time of publication.