Key Points
- S&P 500 Closes Monday’s Gap and Retakes the 50-Day Moving Average
- New Highs for Discretionary vs. Staples
- More Room to Run for the Lumber/Gold Ratio
- Small Caps Making the Turn vs. Large Caps?
- Growth Struggles Against Value as Resistance Holds
Chart in Focus:
The S&P 500 has closed the gap that opened on Monday morning and has reclaimed the 50-day moving average. During the brief pullback that took the index below the 50-day moving average, the 14-day RSI did not become oversold, indicating a lack of sustained downside momentum. The next few days will be key. Holding the moving average will set the stage for a move back to record highs. Failure from current levels will open the door to further weakness.
The following relationships can help give us a sense of the level of risk appetite on the part of investors.
High Beta vs Low Volatility
Thus far, the slight advantage that we gave to High Beta over Low Volatility last week is playing out as the ratio moves higher from the 50 and 200-day moving averages. The stage is now set for a move to the highs from earlier this year. This is on the heels of a bullish divergence on the part of the 14-day RSI, which made a higher low as the ratio made a lower low on August 18th. The RSI is continuing to move higher and will now attempt to shift to a bullish regime. Doing so will increase the odds of a resumption of the uptrend that began last November.
Consumer Discretionary vs Consumer Staples (Equal Weight)
The ratio of Consumer Discretionary stocks relative to Consumer Staples stocks is moving to a new high amid signs of a breakout from the consolidation that has marked trading for the majority of 2021. The ratio is above the rising 50 and 200-day moving averages as well as support at the 2018 highs. The 14-day RSI is in the process of breaking the downtrend from the high set earlier this year, a sign that bullish momentum is increasing.
Copper vs Gold
The Copper/Gold ratio remains in the consolidation that we have been highlighting for the past few weeks, struck between price-based support and the resistance at the 2018 highs. The ratio has retaken the 50-day moving average, but we note that the 14-day RSI continues to make lower highs, a sign that upside momentum is not sticking. Perhaps the current consolidation is simply a way to give the 200-day moving average time to catch up after the ratio extended in May. If that is the case, we would expect to see a move to the top of the consolidation and then a break to new highs.
Lumber vs Gold
The Lumber/Gold ratio continues to press to the upside after holding support and leaving a bullish divergence on the chart (14-day RSI made a higher low as price made a lower low). The ratio is above the 50-day moving average, which is beginning to turn higher, opening the door to a move toward the 200-day moving average.
Small vs Large
The Small Caps vs. Large Caps ratio has rebounded this week to retake the declining 50-day moving average after 14-day RSI made another higher low. This is a step in the right direction for Small Cap bulls and another data point that speaks to investors’ increasing risk appetite. There is now room for a move to the 200-day moving average, which currently lines up with strong price-based resistance. If a near-term rally is to be considered anything more than a counter-trend bump, this resistance level will need to be overcome.
Growth vs Value
The Growth/Value ratio is stalling at resistance, and the 14-day RSI has made a lower high, signaling that upside momentum may be waning. The ratio remains above the 50 and 200-day moving averages with the former now becoming a key level to watch. If it is broken to the downside, the 200-day moving average would become a likely downside target and signal a sustained shift back to leadership on the part of Value. This scenario would line up with an increased risk appetite in the market.
Take-Aways
Last week we noted that there were signs of increased risk appetite on the part of investors. Despite a scare on Monday, this view has largely held true this week. Lumber is leading Gold and Discretionary is breaking out relative to Staples, two key data points in the “risk-on” thesis. At the same time, the Growth stocks that many turn to in times of stress are beginning to stall relative to Value stocks. This all plays out as the S&P 500 closed the gap that opened to the downside on Monday and retakes the 50-day moving average.
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