The major market indexes found support, and buyers lifted prices slightly, although not enough to erase yesterday's strong sell-off. The S&P 500 index (SPX) closed nearly 0.5% higher for the day, while the Nasdaq 100 (NDX) and Russell 2000 (RUT) indexes both closed more than 1% higher. This is a mildly bullish signal since the riskier stocks were showing more investor interest than the safer, blue-chip stocks. If investors could remain calm in the days to come, today will likely signal the beginning of the next move higher.
However the CBOE Volatility Index (VIX) remains slightly elevated, and the next two trading sessions could see significant moves as fund managers balance their portfolios in preparation for the fourth quarter. The next two trading days may actually provide a signal for how investors are likely to position themselves in the months ahead. And so far, the returns of bond funds look attractive at all levels. Should one or more of the bond funds in the chart below be enticing to investment managers, they may opt for a less risky portfolio to close out the year.
Health Care Sector's Poor Performance Reflects Investor Fear
Many professional money managers assume that stocks in sectors that have lagged behind in a bull market may be undervalued or oversold and are due for a rebound. This assumption often proves fruitless if fundamental or external factors weigh on the sector. In the case of health care sector stocks, it seems clear, as pointed out in this article, that political risks trigger investors to shy away from the sector.
With the sector badly underperforming the markets through 2019 so far, is it reasonable to expect a rebound? Based on the current price action, the answer is probably not. Over the weeks to come, investors will want to watch the trendline this sector has followed. Should the price action pierce the trendline, it may signal a move lower.
One Bellwether Health Care Stock to Watch
Shares of Cigna Corporation (CI), which recently expanded its healthcare exchange offerings to new markets, has shown enviable business conditions and performance in its operations of late. But is the stock ready to rebound? It is a good question because if the healthcare sector were to stage a rebound at all, this stock is a likely candidate to be a leader in the sector. The answer found in the price action (see chart below) is probably not.
When stocks are ready to change from a downward trend to an upward trend they quite often signal a bullish divergence with such indicators as Momentum, Relative Strength, or Rate of Change. When these indicators make higher lows as the price makes lower lows, then the moment has arrived where a turnaround is likely. The current dynamic playing out in Cigna's share price is the opposite of what a trader would like to see.
The Bottom Line
U.S. stock indexes showed a tepid rebound compared to yesterday's session. The small-cap and tech stocks led the way, showing a potentially bullish signal. Meanwhile, bond funds look attractive right now, and fund managers may be tempted to trade safer strategies for the fourth quarter this year. Health care stocks, a sector which usually benefits when investors seek safety, is badly lagging the markets. If a rebound occurs, it will be evident in stocks like Cigna.
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