Key Points

  • S&P 500 Sees a “Relief Rally”
  • Small Caps Bounce With Improving Relative Strength
  • Commodities Are Reasserting the Bullish Trend
  • Arms Index Presents an Interesting Breadth Development
  • Sentiment Remains Fearful

Mid-Week Market Update – United States

The S&P 500 remains below resistance and the declining 50 and 100-day moving averages, keeping the ball in the hands of the bears for now. The title of this note last week was “Time for a Relief Rally,” and that appears to be playing out over the past four days of trading. However, bulls will want to see the 4,200-level recaptured to have confidence that it will have staying power.  

The 14-day RSI did not become oversold sold as the index came under pressure last week but remained in a bearish regime despite a near-term lift.

The S&P Small Cap 600 Index has not sat by and watched the rally in the S&P 500. It has also staged a bounce but remains below resistance at 1,260 and the declining 50 and 100-day moving averages. The 14-day RSI has turned higher but continues to trade in a bearish regime. The bears are in control until resistance is cleared.   

The relative trend, however, is improving, breaking above the 50-day moving average. Clearing resistance at the October/November peak would put the group in a position to continue to lead.

The NASDAQ 100 is still below resistance and the moving averages despite a rally over the past four days. The bears remain in control of the trend until 13,000 is cleared to the upside. Here too, the 14-day RSI has not become oversold, but it does remain in a bearish regime for now.

The relative trend is bearish, below the declining 50-day moving average, and trading near one-year lows.

The 10-Year Treasury Note has found support at the 2018 lows and has tried to bounce. The Note remains below the steadily declining 50 and 100-day moving averages. We remain open to the idea that there is still room for a countertrend rally to play out but lack enough evidence to state that the bearish trend is turning.

The 14-day RSI continues in a bearish regime.

The Bloomberg Commodity index has moved back above resistance after finding support at the 50-day moving average. Holding above these levels will enhance our view that the index has simply been pausing within an uptrend. The rising 200-day moving average is on the verge of meeting important support near 120. The 14-day RSI is testing the declining trendline, a break of which would lend momentum confirmation to bullish price action.

Commodities continue to outperform equities as the ratio trades above the 50-day moving average and the recent high.

An Interesting Breadth Development

As the relief rally plays out in U.S. Equity markets, we want to highlight a potentially bullish development. The Arms Index (TRIN), also referred to as the short-term trading index, compares the number of advancing and declining stocks (AD Ratio) to advancing and declining volume. TRIN has moved below 0.50 twice in the past three days, signaling a much larger volume in advancing stocks relative to declining stocks. While not always a precise tool, readings below 0.50 can viewed as a short-term breadth thrust that could signal a turn to the upside and put the bears on notice. This would be confirmed by the indexes breaking the resistance levels that we have highlighted above.

Sentiment Check

The CBOE S&P 500 Volatility Index (VIX) has moved below 30, and the 10-day moving average is rolling over from a lower high. Overly bearish sentiment was a reason that we were looking for a relief rally last week. The VIX remains elevated and continues to trend higher, remaining a possible tailwind for equities.

Source: CNN.com

Take-Aways:

Equities have staged a sharp four-day relief rally, a good starting point to arresting the decline that has gripped markets for much of 2022. At the same time, the Arms Index has put in extremely low readings on the two of the past three trading days, a signal that the bulls are still putting up a fight. Finally, sentiment remains bearish, which could provide added fuel. These bullish dynamics are on our radar and would be confirmed by the indexes breaking above key resistance levels. Until then, the bears remain in control of the trend.

Note: The Research team will be attending a company event on May 19th and May 20th; the Daily Note will not be produced these days. The normal schedule will resume on May 23rd. Thank you!

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