The Pause That Refreshes

We are sure you have noticed, but the stock market has begun to take a breather in the last week.

The major indices are only slightly off their highs, but we have seen breadth indicators begin to weaken.

Right after the election – and the unexpected victory of President Trump AND the Republicans taking both houses of Congress – pretty much everything traded higher.

Now, though, we have begun to see some weakness in specific sectors.

Overall, the technology sector has been struggling for the last few months.

Here is a chart of the technology-heavy NASDAQ-100 Index (NDX)…

It recently hit a new high but has quickly rolled back over.

Underneath the surface, though, one key area of the technology sector is struggling.

Here is a chart of the Philadelphia Stock Exchange Semiconductor Index (SOX)…

This index tracks the semiconductor industry; its largest weighting is NVIDIA Corporation (NASDAQ: NVDA).

This group led the NDX and the entire market higher for the year's first half but now sits well below its July highs. It sits below the level where it was in early February. It now has yet to do much for most of the year.

NVDA is also at all-time highs, so the other components must be struggling.

This is one of several signs of “cracks” in the strength of the overall stock market.

Here is another. Below is the Health Care Select Sector SPDR Fund (XLV) chart. This tracks the performance of companies involved in the healthcare industry.

Healthcare has also been a leading area of the stock market and hit a new all-time high in early September. Since then, though, it has corrected more than -10% as the overall stock market has hit new highs.

What is going on with these two groups? Is it telling us something about the whole stock market when two leading groups struggle?

First, both of these groups have seen mixed earnings results from several components.

In the semiconductor industry, companies with large exposure to slow growth areas in automotive, industrials, PCs, and mobile have posted "noisy" results.

Artificial intelligence spending and data centers continue to power the semiconductor industry, but several large companies needing more exposure to these areas have been disappointed.

Something similar has happened in the healthcare industry, where some large health insurers have also posted poor results. This appears to be the result of their pricing of certain contracts with the government, but it has shaken overall sentiment.

In the last week, though, both of these sectors have been hit even harder.

As the Trump administration begins to roll out its appointments to head up the various agencies and other plans, it has put some doubt into the market.

There has been discussion of rolling back the 2022 CHIPS and Science Act, passed during the Biden administration, that pledged nearly $150 billion of investment into the domestic semiconductor industry.

Given the administration's priorities, we don't think pulling back this spending makes much sense, but the risk has combined with some poor earnings to shake up the group.

At the end of the week, we also saw the controversial Robert F. Kennedy nomination to head up the Department of Health & Human Services. This sent healthcare stocks – especially pharmaceutical companies – down hard.

We have doubts whether the Senate will approve him, but the betting markets (Kalshi in this case) have him at 76% odds of becoming Secretary.

 How bad is this for healthcare stocks?

We are sure he would shake up the government's relationship with the industry, but we doubt it will truly hurt it. Strong underlying growth trends exist, and America leads the world in this sector.

Both of these are cases where we see sector-specific issues impacting these leading groups.

In the meantime, check out the chart of the Financial Select Sector SPDR Fund (XLF). This tracks the performance of financial services businesses, including banking, investment banking, and other areas.

This sector has been quietly leading the market since the middle of the year and thrust higher with the Trump victory.

The financials sector is the second largest sector of the S&P 500 after technology. With this recent rally, it surpassed healthcare in second place.

While it doesn’t get as much press coverage as technology, it is the heart and circulatory system of the stock market AND economy. As long as it is doing well, we remain confident of the path in the stock market.

For many reasons, we know there could be storm clouds on the horizon with financials, but we think we will see it in the stocks first…

For now, the weakness we see in certain areas of the stock market is a healthy respite for the market to catch its breath.

We look forward to taking advantage if it gets any worse – especially in these leading sectors that have stumbled.