All the talk going into next week will be about the importance of Nvidia's results and the impact that it could have on the market. That's no 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 and didn't push much higher. The S & P 500 only reached the 7,000 milestone intraday and has struggled to close above that level, receding each time it has neared it. The market breadth has been strong, but the leadership is wrong. That's the bigger story. Let's simplify it. What's going on? Let's look at historical cycles to see the normal ebbs and flows of market rotation. This is from the CMT curriculum and shared by my friends at StockCharts.
What are the three leading sectors for 2026? If you guessed energy, materials and staples, you would be correct. They have fantastic gains of 22.5%, 16.9% and 13.3%, respectively so far for 2026. These sectors tend to lead near market tops, hence not ideal leadership. Will this be the top? I don't think so, but a changing of the guard and a pause seems to be in order.
One of the things we discussed coming 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 three of the leading sectors that year? Health care, utilities and real estate. Guess what sectors just lifted their heads over the past few weeks? Yep... Health care, utilities and 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 its all-time high and now it’s coming back to life. The sector is up 7.4% for 2026 and looks to continue its climb. Then there is health care.
In hockey, you succeed by skating where the puck is going. In the market, you need to position yourself toward new leadership. The State Street Health Care Select Sector SPDR ETF (XLV) is starting to turn around. It is only up 1.9% year-to-date, but when breaking down the technicals and watching the sector rotation going on in this market, we need to examine it more closely. Some of its most well-known names in CVS , Humana and UnitedHealth have been struggling, but the largest components 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 recent breakout, the likelihood is for this to continue to new highs and move higher.
We also mentioned the cyclical nature of this market. Knowing this and seeing the current set-up, it is very likely to be the next sector to follow the lead of utilities and real estate.
Lastly, it's always good to put the moves in a longer-term perspective. When looking at the XLV on a five-year weekly chart, we see the sector is on the verge of a major breakout. There are some negative momentum divergences on this time frame that make me think it may take more time before fully breaking out, but the $60 level is worth watching.
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 with great risk/reward set-ups that favor buying the sector. The $160 level is crucial for confirmation that this trade will succeed. If price can clear this technical hurdle, look for upside targets to the mid 180's over the next several months. Until we get that sign, we wait patiently and add to the name on pullbacks to the $155 level. Depending on your risk threshold, it may take some time for the perfect trigger to shoot your shot but given the rotational theme, health care should be the next sector to thrive in this market environment.