Key Points

  • Credit Markets are Not Stressed
  • S&P 500 at a Key Level for the “Buy the Dippers”
  • Ten-Year Note is Down Week-Over-Week
  • Commodities are at Support, Bounce Likely
  • Sentiment has Turned to “Extreme” Fear

Chart in Focus

With the words “contagion” and “Lehman” being used often over the past few days to describe the possible risks associated with a highly indebted Chinese company (Evergrande), it may be insightful to look at the credit markets to take the pulse of the situation. The BofA Merrill Lynch US High Yield CCC or Below Option-Adjusted Spread is a way to gauge credit risk in the market. It is currently trading near the lowest levels that we have seen since 2014 and, thus far, is not indicating signs of stress. Prior to the failures of Bear Stearns, Lehman Brothers, and other key “events” this spread was already rising quickly. That is not the case right now.

Mid-Week Market Update – United States

After breaking below the short-term support level at 4,470 last week, the S&P 500 has extended its decline to move below the 50-day moving average, which has been a key level for the uptrend. At the same time, the next support level, at 4,380 is in the process of being tested. Last week we wrote that the odds favor the “buy the dip” strategy working again if 4,380 holds as support. The next few days will likely prove if this  statement holds true. If support is quickly retaken, the stage would be set for the index to close the gap up to the 50-day moving average.

The 14-day RSI has also broken support after leaving a bearish divergence on the chart. Thus far, the selling pressure on equities has not produced an oversold condition. We would expect to see equities begin to rebound from current levels.

The trend for the S&P Small Cap 600 remains what it has been since March, flat and sloppy. The index is below the 50-day moving average but remains above important support at the 1,250 level. Here too, the 14-day RSI has not reached an oversold position. We also find it interesting that while equities have been under pressure, and there are now fears of a contagion, this higher risk group of stocks has not broken down in a meaningful way.

In fact, relative to the S&P 500, the Small Caps are holding support and making another attempt to break above the 50-day moving average.

The NASDAQ 100 Index has moved into a zone of support, below the 50-day moving average but between the key levels that we have been highlighting (14,900 – 15,200). This is a logical spot from which to expect a rebound and a continuation of the uptrend.

On a relative basis, the NASDAQ 100 remains leadership. The ratio is trading above the rising 50-day moving average which is in line with short-term support.

The 10-Year Treasury Note continues to test and hold the uptrend line after failing to clear the 50 and 200-day moving averages. Here too, it is interesting to note that while the word contagion has been used often over the past week, there has not been an aggressive haven bid to treasuries. Price is lower than it was when we wrote last week.

The 14-day RSI remains neutral.

The Bloomberg Commodity Index has pulled back to test price-based support and the rising 50-day moving average. This is a logical spot from which a rebound and an attack on the recent highs should unfold.

The 14-day RSI is testing the downtrend line from above but remains in a bullish regime.

Drilling down on the key commodities that are on our radar:

  • Copper – holding support in the consolidation.
  • Gold – no real rebound for this haven asset.
  • Lumber* – strong rally from support.
  • Crude Oil – must hold $67 to have a chance at new highs in the near-term.

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

Sentiment Check

The CBOE Volatility Index (VIX) has spiked over the past week as equities have been under pressure and the “contagion” fears spread. The current spike, thus far, has not produced a higher high than the previous flare-ups. Odds favor this one being short-lived.

The CNN Fear & Greed Index has moved into a position of “Extreme Fear” with a reading of 23, down from “Fear” and a reading of 31 last week.


Fears of “contagion” are running through the media but thus far are not materializing in the markets. The safe haven assets are not seeing the types of  buying that one would expect. The credit markets are calm, and commodities are holding support. Could this change at any moment? Of course, it could, but for now the title of our most recent episode of Who Charted? likely applies.

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.