The pressure of global market weakness is finally, slowly being felt by stocks in the U.S., where the Standard & Poor's 500 (^GSPC) is threatening to sag beneath the lower end of its stubborn, tight trading range.
It's been a low-drama, grinding pullback that has cost the U.S. benchmark some 2% over the past 16 trading days, taking it down to levels seen three times before over the past three months.
The retreat has not escaped the notice of tactical professional traders, as speculative hedge funds now have more bearish positions than at any time since October. Short selling in the broad market is also back up to October levels. This rebuilt wall of worry and active hedging instinct are potentially good things for stocks, as caution can provide some insulation from steeper declines.
Yet a handful of areas within the market also appear rather important right now, having held up pretty well -and they might have a lot to say about whether this lower end of the trading range holds or not.
One such pocket of relative strength in recent weeks has been the smaller stocks. The iShares Russell 2000 ETF (IWM) has outperformed the S&P 500 by more than two percentage points since the market began softening up before Memorial Day. This speaks to domestic economic firmness and insulation from currency swings.
Another notable leadership group is the bank stocks. The SPDR S&P Bank ETF (KBE) has been a standout as longer-term Treasury yields have climbed, supporting fatter net-interest margins.
The strategists at Bank of America Merrill Lynch describe bank shares as a crucial swing vote in the market’s judgment of eventual Fed rate increases. If the Fed is seen on track to tighten and bank shares hold up well, it implies rates are rising for the "right" reason of a stronger economy. If the Fed is seen hiking and bank stocks sag, it suggests rising risk of the policy error of tighter money in a vulnerable economy.
The third bellwether of the moment is biotech. The iShares Nasdaq Biotechnology ETF (IBB) has nicely recovered from its April correction. It represents investors willingness to believe in the magic of life-giving innovation and their appetite for shouldering the risk of highly speculative investments.
There's no doubt that many areas of the sector appear overheated, with huge market values bestowed on long-shot therapies. But from a market-health perspective, this sector probably needs to hang in there to prevent an already sputtering market from losing another engine.
Another standout group, largely for industry-specific reasons, has been health insurers. The iShares US Healthcare Providers ETF (IHF) has been a monster, rising 38% in the past year and sitting near its all-time high.
The broadened market for health coverage following Obamacare’s rollout has led to more certainty and more customers, and the industry is rapidly consolidating. This week we’re hearing that UnitedHealth (UNH) approached Aetna (AET) about a merger, and Anthem (ANTM) has made overtures to Cigna (CI).
It’s as if the private sector is trending toward that concentrated buying power for medical care that advocates of single-payer insurance have wished for.
These are sensitive proposed combinations, from an antitrust perspective. But the theme of mature industries rationally consolidating in order to gain efficiencies and reward shareholders is not limited to HMOs, and indeed won’t likely end soon.