Key Points
- Dow Theory Buy Signal
- More New Highs for the S&P 500 and NASDAQ 100, Small Caps Join the Party
- The 10-Year Note Is Not Going Down Without a Fight
- Commodities Look to Rebound Near Price Support
- Sentiment Becomes More “Greedy”
Chart in Focus
As Manish Khatta pointed out in the most recent edition of Who Charted?, we now have a Dow Theory “buy signal” in play as both the Dow Jones Industrial Average and the Dow Jones Transportation Average have traded to new highs. One of the main arguments for the equity bears this year had been a lack of confirmation as the Industrials traded higher, but the Transports did not. That bear case has now been removed from the argument.
Mid-Week Market Update – United States
The S&P 500 closed higher for a fourth consecutive day and finished at record levels once again. The index remains in a clear uptrend, above the rising 50 and 100-day moving averages. Price-based support is at the breakout level near 4,545. Above this mark, odds favor a continuation of the bullish trend into the end of the year.
The 14-day RSI has also made a higher high as it pushes into an overbought condition. This lends momentum confirmation to the bullish price action.
Small Caps have been the talk of the town this week as they have rallied to break from the consolidation that has marked trading since March. At the same time, the 50-day moving average moved above the 100-day moving average. The 14-day RSI is in a bullish regime and has been making higher lows. For small Cap bulls, the key now is to hold above the breakout level and build on recent strength. This would add fuel to the rally in equities and further increase the odds that stocks will move higher into the end of the year.
Relative to the S&P 500, Small Caps are testing the 50-day moving average while remaining above important support. Closing above the October peak would set the stage for Small Caps to take a leadership position.
The NASDAQ 100 is also trading at record levels after breaking out last week to complete the trifecta. The index is above the 50 and 100-day moving averages, both of which are rising. Above the breakout level, the path of least resistance is to the upside. Price strength is confirmed by momentum as the 14-day RSI moves into an overbought condition and has made a higher high.
On a relative basis, the NASDAQ 100 has broken above the 50-day moving average and has set its sights on the September highs. A breakout would confirm that the NASDAQ 100 has retaken a leadership position.
The 10-Year Note is not going down without a fight as it wrestles with support/resistance at the April lows. In our Note on Monday, we wrote that we would not be surprised to see a bounce from current levels, which appears to be playing out in the near term. However, below the 50 and 100-day moving averages, the benefit of the doubt remains with the bears. So far, the 14-day RSI is holding in a bearish regime.
The Bloomberg Commodity Index has been taking a bit of a pause after a strong run. Support at the 102 levels remains key, and the index is holding above it for now. This is a logical spot for commodity bulls to step in to “buy the dip” and use the breakout level to manage risk in the short term. Longer-term, the trend is bullish above the rising 50 and 100-day moving averages, confirmed by the 14-day RSI trading in a bullish regime.
Relative to the S&P 500, Commodities are testing the rising 50-day moving average. Again, a logical spot for the bulls to regain control.
Within the commodity space, the trends for key markets have become mixed:
- Copper – Continues to fade, and support is in the $4.30 – $4.40 zone.
- Gold – Stuck in a consolidation, key levels are $1,700 and $1,820.
- Lumber – Support at $650 has broken, taking the upside to $850 off the table for now.
- Crude Oil – Small consolidation at the highs, bulls remain in control.
Sentiment Check
The CBOE Volatility Index (VIX) is flat on the week despite the S&P 500 trading to new highs. Bigger picture, the VIX has been trending down over the course of the year, and spikes have been short-lived. While we can’t make the case that this VIX is at a level that provides a contrarian tailwind, we continue to see flare-ups as an opportunity for the bulls, should they arise.
The CNN Fear & Greed Index has moved into an “Extreme Greed” position this week, with a reading of 78, up from 70 last week. We can’t say that this is too surprising with the major indexes trading at record levels. Further upside in this metric will begin to serve as a contrarian signal for the possible profit-taking in equity markets.
Take-Aways:
The year-end melt-up scenario that we have been highlighting remains in place. The breakout in Small Caps to join the S&P 500 and NASDAQ 100 at record levels adds fuel to the bullish trend for equities. At the same time, there is now a Dow Theory “buy signal” in play as the Industrials and Transports have broken to new highs together. Commodities will look to reassert tier bullish trends if price-based support holds.
Sentiment is the one “knock” on the market that we have now. The VIX is trading near the lowest levels of the year, and the CNN Fear & Greed Index has moved into a position of “Extreme Greed.” This will become an issue if support levels are broken. Until then, the trend is higher for equities.
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.