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Key Points

  • A Relative Breakout for Semis Could be a Bullish Equity Signal
  • Will the 50-day Moving Average Give the “Dip Buyers” Another Chance in the S&P 500?
  • NASDAQ 100 Remains Leadership; Small Caps Continue to Lag
  • Commodities Trade to Five Year Highs
  • Sentiment Weakens as Stocks Come Under Pressure

Chart in Focus

As the equity market has come under near-term pressure, there is reason to believe that the selling may be short-lived. The S&P 500 Semiconductors and Semiconductor Equipment Index is holding near record highs. The index remains in an uptrend, above the rising 50-day moving average.

Importantly for the ongoing uptrend in equities is the fact that Semis are on the verge of a breakout relative to the S&P 500 after holding the 50-day moving average.

Mid-Week Market Update – United States

The S&P 500 has broken below the short-term support level at 4,470 and is once again testing the rising 50-day moving average. This measure of the intermediate-term trend has been key to the uptrend since it was decisively broken last November. Now, with all eyes on it, the key question is “will it come to the aid of the dip buyers one more time”? Just below the moving average is more important support at the 4,380 level. As a side note, bullish investors want to see the recent tendency of early strength giving way to afternoon selling come to an end quickly.

During the current pullback for the index, the 14-day RSI has remained in a bullish regime and is now near levels from which short-term selling pressure has abated numerous times this year. Odds favor the “buy the dip” strategy working again if 4,380 holds as support.

The S&P 600 Small Cap Index has not been immune to the selling pressure in equities over the past week plus. The index is below the declining 50-day moving average as it continues to trade in the consolidation that has been in place since March. Support is near the 1,250 level while resistance is near 1,400. The 14-day RSI is stuck in the middle of the range but has not broken below 40.

Last week we highlighted that Large Caps and Growth were leadership. Here we can see that the Small Cap Index remains in a downtrend relative to the S&P 500. The ratio is below the declining 50-day moving average as it now tests support.

The NASDAQ 100 Index has retreated from all-time highs but is arguably holding up better than the S&P 500 and the S&P 600. The NASDAQ remains above short-term support at 15,200, the rising 50-day moving average, and stronger support at 14,900. The 14-day RSI is holding in a bullish regime after making a lower high.

On a relative basis, the NASDAQ 100 remains leadership. The ratio is trading above the rising 50-day moving averages and is holding above near-term support. 

The 10-Year Treasury Note remains in a consolidation for now but is beginning to show hints of a downside resolution. The Note is below the 50 and 200-day moving averages and the key $134 level. The uptrend from the April lows is the now the last line of support within this consolidation and should be watched closely.

The 14-day RSI is in the middle of the range, confirming the ongoing consolidation.

The Bloomberg Commodity Index has bucked the trend of recent weakness in equity prices, having traded to its highest level in more than five years after breaking out of its recent consolidation. Support at the 96 level remains important along with the rising 50-day moving average.

The 14-day RSI has held above the declining trend line as it begins to confirm the strength that we are seeing in price.

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

  • Copper – above support, still in a consolidation.
  • Gold – trying to stabilize after breaking down from its consolidation.
  • Lumber* – battling important support, trying to build a base.
  • Crude Oil – moving higher after holding support at $67.

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

Sentiment Check

The CBOE Volatility Index (VIX) is holding above the 18 level, having ticked higher this week as equity prices have moved to the downside. While the index remains in a downtrend, we do note that it has been making slightly higher lows of late.

The CNN Fear & Greed Index has moved down to 31, and into a “fear” position, this week from a “neutral” reading of 53 last week. This is not a surprise given the weakness in stock prices. We also note that this index has not displayed high levels of complacency as the uptrend for the S&P 500 has progressed over the past 10 months.

Take-Aways:

Stocks have pulled back over the past seven days of trading and the S&P 500 has once again reached the 50-day moving average which has been a key guidepost for the “buy the dip” crowd. One interesting dynamic that equity bulls want to see change quickly is the fact that rallies early in the day have been giving way to afternoon selling pressure. Growth over Value and Large over Small remain ongoing themes and we are closely watching the 10-Year Note as a guide for any shifts that may occur. While, away from equities, Commodities remain a standout as they buck the near-term trend in risk assets.

Sentiment metrics have weakened this week as equity prices have declined.

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.