Charts suggest this sector could be the next to lead the market higher
All the talkgoing intonext week will be about the importance of Nvidia ‘s results and the impact that it could haveonthe market.That’sno secret.I gave my thoughts to Morgan Brennan earlier in the week (literally early) on “Worldwide Exchange.” The market recently hit some nice numerical milestones — S & P 7,000, Dow 50,000 — but those rallies were short lived anddidn’tpush much higher. The S & P 500 only reached the7,000 milestoneintraday and has struggled to close above that level, receding each time it has neared it. Themarketbreadth has been strong, but the leadership is wrong. That’sthebiggerstory. Let’ssimplify it. What’sgoing on? Let’slookathistorical cycles to see the normal ebbs and flows of market rotation. This is from the CMT curriculum and shared by my friends atStockCharts. What are the three leading sectors for 2026? If you guessed energy, materials and staples, you would be correct. They have fantastic gains of22.5%, 16.9%and13.3%,respectively so far for 2026. These sectors tend to lead near market tops, hence not ideal leadership. Will this be the top? Idon’tthink so, but achangingofthe guardand a pauseseems to bein order. Past precedent One of the things wediscussedcoming into the year was the importance of the presidential cycle. We are in year two — a midterm election year — and that tends to be the most challenging time for markets. When looking back at Trump 1.0 in 2018, we see similar characteristics. What were threeof theleading sectors that year?Health care,utilitiesand real estate. Guess what sectors just lifted their heads over the past few weeks? Yep… Health care,utilitiesand real estate. Last week utilities rallied over 8% and are sitting on the cusp of a major breakout. Real estate jumped as well. Just two weeks ago, it was 20% below itsall-timehigh and nowit’scoming back to life.The sector isup7.4%for 2026 and looks to continueitsclimb. Then there ishealth care. The nexttomove? In hockey, you succeed byskatingwhere the puck is going.In themarket,you need to position yourself toward new leadership. The State Street Health Care Select Sector SPDR ETF(XLV) is starting to turn around. It isonly up1.9% year-to-date, but when breaking down the technicals andwatchingthe sector rotation going on in this market, we need to examine it more closely. Some of its mostwell-knownnames in CVS , Humana and UnitedHealth have been struggling, but the largestcomponents Merck , Johnson & Johnson and Amgen — all Dow stocks — are trading at or near 52-week highs. On the yearly chart, we see a recent breakout and now an ascending triangle pattern that looks due to resolve. Given its momentum indicators and the recentbreakout,the likelihood is for this to continue to new highs andmovehigher. We also mentioned the cyclical nature of this market. Knowing this and seeing thecurrentset-up,itisvery likelyto be the next sector to follow the lead of utilities and real estate. Lastly,it’salways good to put the moves in alonger-termperspective. When looking at the XLV on a five-year weekly chart, we see the sectorison the verge of a major breakout. There are some negative momentum divergences on thistime framethat make me think it may take more time before fully breaking out, butthe $60 level is worth watching. The trade Again,this is a scenario of positioning your portfolio to where the puck will go next to capitalize on the opportunity. Here we see a golden one withgreat risk/reward set-ups that favor buying the sector. The $160 level is crucial for confirmationthatthis tradewill succeed. If price can clear this technicalhurdle,look for upside targets to the mid 180’s over the next several months. Until we get thatsign,we wait patientlyandadd tothe name on pullbacksto the $155 level.Depending on your riskthreshold,it may take some time fortheperfect trigger to shoot yourshot butgiven the rotational theme,health care should be the next sector tothrive in this market environment. — Jay Woods, CMT with Chase Games DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
