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Key Points

  • Construction Materials on the Verge of New Highs
  • S&P 500 Trades at Record Levels Once Again
  • Is the Relative Trend in Small Caps Stabilizing?
  • The 10-Year Note Fades, Breaks Support
  • Sentiment is Beginning to Move with Stock Prices

Chart in Focus

With the infrastructure bill top of mind for investors, we highlight the S&P 500 Construction Materials Index (part of the Materials sector). The index has “eyes for the highs” after retaking the 50-day moving average and breaking from the May – August consolidation pattern.

Relative to the S&P 500, the Construction Materials Index also appears to be making the turn. The ratio has regained the 50-day moving average and broken from a short-term consolidation.

Mid-Week Market Update – United States

The S&P 500 continues in its uptrend, trading to a record high yesterday before fading to close in the lower position of the day’s range. Near-term support remains around the 4,400 level, while more important support is near 4,250. The steadily rising 50-day moving average is in the middle of these two price-based support levels.

The 14-day RSI remains in a bullish regime but the lack of confirmation of the recent price highs continues to play out.

The S&P 600 Small Cap Index is in the middle of a months-long trading range as it tests the flat 50-day moving average from below. Support is near the 1,250 level, while resistance, should the 50-day moving average be broken, is at the top of the trading range. The 14-day RSI remains in a bearish regime for now, unable to break above the 60 level since June.

On a relative basis, Small Caps are below the declining 50-day moving average which lines up with overhead resistance. In the near-term, the ratio has begun to stabilize. Breaking above these two levels is what is needed to make the case that Small Caps are returning to a leadership position.

The NASDAQ 100 Index continues to stall just below record levels. First support is at the 14,500 level, which contains the rising 50-day moving average. More important support for the uptrend is near 14,000. As with the S&P 500, the 14-day RSI for the NASDAQ 100 has not confirmed recent price highs, leaving a bearish divergence on the chart.

The relative trend for the NASDAQ 100 is essentially the opposite of what is seen for the Small Cap 600 Index. In this case, the ratio is above support and the rising 50-day moving average. A break below these two points would be a signal that the NASDAQ 100 is giving up its leadership position.

The 10-Year Note has come under pressure after failing to hold above the declining 200-day moving average. The note has broken below support at the $134 level and is on the verge of testing the rising 50-day moving average. Thus far, the 14-day RSI is holding in a bullish regime, but we note that the 40-level is being tested.

The case can be made that the path of the 10-Year Note is a key driver of the shifts in leadership that we have seen for much of the year. This is especially true for the NASDAQ 100 and the Small Cap 600. As the note is rising (rates are falling) the NASDAQ takes on a leadership role. As the note is falling (rates are rising) we tend to see Small Caps lead.

The Bloomberg Commodity Index is trying to hold support at the rising 50-day moving average. The potential false breakout that we highlighted last week remains in play for now but would be negated with a move back over the 96 level.

If the index is going to stage a rebound to keep its bullish trend in place, this would be a logical place. The 14-day RSI is holding support near the 40-level that marks the lower bound of a bullish regime.

Within the commodity complex, there is a lot happening under the hood:

  • Copper – still in a consolidation above support.
  • Gold – breaks down from the triangle consolidation.
  • Lumber* – retesting support after a feeble rally attempt.
  • Crude Oil – testing support at the $67 breakout level.

*Note that Lumber is not part of the Bloomberg Commodity Index.

Mid-Week Takes

As the S&P 500 continues to grind higher, the theme under surface remains one of constant rotation. Leadership shifts appear to be most sensitive to moves in the 10-Year Note which is essentially stuck in a sloppy consolidation between the two main moving averages.

Sentiment Check

The CBOE S&P 500 Volatility Index (VIX) has moved lower over the past week, and we are watching for a new low to be established within the downtrend that has been place since the major spike in March 2020. We have been making the case that sentiment is not “overly” bullish as the S&P 500 trades at record levels. However, a continuation of the current downtrend will begin to negate that view.

While still in a “Fear” position, we do note that the CNN Fear and Greed Index has moved higher for a second consecutive week. While not a concern at current levels, like the VIX, this indicator is no longer moving in a way that seems to defy what is being seen in the equity market.

Take-Aways:

As the S&P 500 continues to trade at/near record levels, we are beginning to see sentiment move in a similar direction. While not a concern currently, we do note that investor emotions are beginning to move in the same direction as stock prices.

Disclosure: This information is prepared for general information only and should not be considered as individual investment advice nor as a solicitation to buy or offer to sell any securities. This material does not constitute any representation as to the suitability or appropriateness of any investment advisory program or security. Please visit our FULL DISCLOSURE page.