Fear Levels in the Market
Are High

Mid-Week Market Update – United States

The S&P 500 is putting in a valiant effort at support in the 4,200 – 4,300 zone. The bullish divergence that we highlighted last week remains in play as the 14-day RSI has been making higher lows. However, we want to see this indicator break from a bearish regime. The index continues to trade in a consolidation zone, below the 50 and 100-day moving averages and price-based resistance near 4,550.

The S&P 600 is also below the declining 50 and 100-day moving averages while remaining above support at the 1,250 level. At the same time, the 14-day RSI has also made a higher low, leaving a bullish divergence in place. Momentum is still in a bearish regime, but the resilience of this “riskier” market stands out in the face of the current geopolitical headlines.

On a relative basis, Small Caps are holding above the 50-day moving average and have begun to move above price-based resistance. The relative strength from Small Caps is noteworthy and breaking the October/November highs would put the group in a leadership position.

The NASDAQ 100 also finds itself in a battle with important support after undercutting it briefly last week. The index remains below the 50 and 100-day moving averages, with the 50-day in line with price-based resistance near the 15,000 level. Here too, the 14-day RSI has left a bullish divergence on the chart. However, until resistance is overcome, it is hard to make a compelling bullish case.  

Another data point that makes the bull case difficult is the fact that the NASDAQ 100 remains an underperformer relative to the S&P 500. The ratio is below the declining 50-day moving average and price-based resistance.

The 10-Year Note has staged a strong move to the upside, retaking the $128 level and the declining 50-day moving average. Price remains below the 100-day moving average, but the recent spike has caught our attention as we have been in the bearish camp for some time. A break above the $130 level would be a reason to reevaluate this view.

The 14-day RSI also spiked higher with price, and we will now look for a break from a bearish regime as confirmation of a change in the price trend.

The Bloomberg Commodity Index closed at another one-year high yesterday, moving further beyond the 50 and 100-day moving averages as well as important support levels (110 and 106). One of the hallmarks of a powerful bullish trend is an ability to power through overbought conditions. That has been the case for commodities as the 14-day RSI remains above the 70 level. Note that yesterday’s spike was the largest one-day gain for the index since 2009.

The relative trend also remains bullish, above the breakout level and trading at one-year highs.

Sentiment Check

Fear in the marketplace remains elevated, as we can see with the CBOE S&P 500 Volatility Index (VIX) and its 10-day moving average trading to their highest levels in more than a year.

Another way to visualize the elevated levels of fear in the market is to look at the VIX Curve. This is a measure of the one-month VIX subtracted from the three-month VIX. The curve is currently inverted, meaning investors are more fearful about the near term. While these inversions can certainly deepen (2018 and 2020), making risk management a key priority, they do tend to mark near-term lows for the S&P 500. The current inversion has the potential to provide a tailwind to the S&P 500 IF it remains above 4,200.

Finally, the CNN Fear & Greed Index gives us another data point that supports the view that fear is elevated in the market. The reading moved to 18 this week from 35 last week and is now signaling “Extreme Fear.”

Take-Aways: