- U.S. Equities Test their 10-Week Moving Averages; NASDAQ Closes Below
- Rates Fail to Move Higher on the “Worrisome” Inflation Report
- Commodities Pullback but Hold their Breakout Level
- Precious Metals Continue to Improve
- Is Downside Dollar Momentum Waning?
Last week the S&P 500 began by pulling back to test the near-term support level at the rising 10-week moving average before staging a rebound on Thursday and Friday. The late-week rally helped to keep the structure of the uptrend in place, but we note that the 14-period RSI has now exited overbought levels, a sign that momentum in the trend could be waning.
Short-term support remains in the area of the 4,100, in line with the 10-week moving average. Stronger support is near the 3,700 mark, which lines up with the rising 40-week moving average.
The S&P Small Cap 600 Index tested its own 10-week moving average before staging a rebound last week. The index remains above near-term support in the 1,200 – 1,240 range. Stronger support is in the area of the 2018 highs near 1,100. The 14-period RSI continues to work off the overbought conditions that were reached in January of this year and has now moved below the 70 level.
On a relative basis, support at the 2019 consolidation zone continues to hold, but we note the strong resistance zone that comes into play near the 2018 highs.
Within the Small Cap universe, Consumer Staples and Utilities were among the top performers on the week, lending a defensive tone to trading. Also within the top groups were Materials and Energy, keeping leadership within the areas of the market that have benefited from reflation.
The NASDAQ Composite Index remains the biggest concern for U.S. equities. The index closed below the 10-week moving average last week despite a rebound in the final two sessions. The late-April rally attempt, which took the index to new highs, was not confirmed by momentum as the RSI failed to become overbought.
Relative to the S&P 500, the NASDAQ closed the week below support, completing the topping process that began last summer.
U.S. Fixed Income
The 10-Year Yield remains below resistance at the 2019 consolidation and is in the process of testing support at the rising 50-day moving average. Note that after becoming overbought, the RSI is now in the process of testing support at the levels that have marked lows during the uptrend in yields. A break below the moving average, and a break of this RSI level, would be a signal that investors are becoming less risk-seeking.
As has been the case for the past few weeks, rates at the long-end of the curve (20 and 30-Year) remain under pressure. The 30-Year Yield is testing support, an interesting development considering the inflation data that was released last week. At the short-end of the curve, the five-year is more closely tracking longer rates while the two-year remains pinned to the lows.
The CPI data that was released last week was “worrisome” and “should have” been bearish for Treasuries, according to some lines of thinking, yet yields at the long-end of the curve failed to make upside progress. This begs the question: Is the inflation theme fully priced into markets? This is a development that is now top-of-mind.
The Dow Jones Global World Stock Index (Excluding U.S.) also rebounded from the 10-week moving average after undercutting it early in the week. As the Global Dow trades near record levels, we note that the RSI failed to become overbought recently and has been making lower highs. This is a sign that upside momentum is waning.
On a relative basis, global stocks remain in a consolidation vs. the S&P 500, and we are closely watching the recent lows to determine if support will hold.
After breaking from the consolidation in the previous week, the Bloomberg Commodity Index saw a pullback last week. The index remains above the breakout level for now and well above the rising 10-week moving average. The 14-period RSI is extremely overbought.
Given the recent declines in long-term interest rates mentioned above, it would not be surprising to see commodities continue to pause after a more than 60% rise from the pandemic lows.
Under the surface of the commodity landscape, the Precious Metals continue to show signs of life after holding support. Industrial Metals have begun to pull back from recent highs, as have the Agricultural commodities. Energy continues to test resistance but is unable to break out.
The U.S. Dollar
The U.S. Dollar Index remains under pressure and below the declining 10-week moving average. The index remains above important support at the 2018 and 2021 lows and we note that the RSI has failed to become oversold since testing the 30-level last August. This is a sign that downside momentum may be waning. The dollar has been weak, as equities have been strong since the March 2020 lows. A reversal for the greenback would be meaningful in our view.
While the trend in equity markets remains to the upside, we note that there are some signs that becoming less aggressive may be prudent. Treasury yields moved lower despite the “worrisome” inflation reports last week. At the same time, Agricultural commodities and Industrial Metals are beginning to pull back after becoming extended to the upside. Finally, downside momentum in the U.S. Dollar appears to be waning.