Key Point
- Small Caps are Losing Relative Support
- S&P 500 and NASDAQ Trade at Record Levels
- The 10-Year Note is Simply in a Range
- Commodities are a Key Level
- More Fear Than Greed in the Market
Chart in Focus
Below, we highlight that Small Caps are beginning to break down relative to the S&P 500. Yesterday, six of 11 sectors of the Russell Small Cap 600 made 21-day relative lows. One of those was Materials. The absolute trend is a consolidation below the 50-day moving average. However, the relative trend tells the story, as support has been lost. The ratio is below a flat 50-day moving average.
Mid-Week Market Update – United States
The S&P 500 staged a late rally to minimize losses yesterday as it remains above the breakout level which marks first support at 4,250. We have written in the past that the rising 50-day moving average has been a good guide for the trend in the index, and it is approaching the breakout level as well. The rising 200-day moving average is not a factor currently.
The 14-day RSI had been the only bearish datapoint on the chart. However, it has now broken the series of lower highs and is in an overbought position. This lends a momentum confirmation to the bullish price trend.
The S&P Small Cap 600 Index remains in a consolidation that has been in place since the middle of March and closed below the 50-day moving average yesterday. Support remains at the 1,300 level and then at the rising 200-day moving average below that. On the upside, resistance is at the top of the range, near 1,420. The 14-day RSI confirms the choppy price action, as it sits in the middle of the range.
Relative strength is where the concern lies for Small Cap bulls. The ratio is below a flat 50-day moving average and is breaking down from the consolidation that has been in place since April.
The NASDAQ Composite Index traded to a new high yesterday, above the 50 and 200-day moving averages as investors continue to rotate back into the “growth” themes within the equity market. Support is at the 14,200 level. The 14-day RSI is in an overbought condition, confirming the price strength.
On a relative basis, we are on watch for a break, up and out, of the consolidation that has been playing out since March. The ratio is above the 50-day moving average which continues to turn higher.
The 10-Year Treasury Note is the overly simplistic rational for the rotation seen above (Small Caps lagging, NASDAQ leading). As the Note was falling and yields were rising, Growth stocks came under pressure. However, support has continued to hold, and rates have backed off, alleviating some of that pressure.
For all the excitement of late, the 10-Year Note remains in a trading range between the 50 and 200-day moving averages and between price support and resistance. The 14-day RSI confirms, as it trades in the middle of the range.
As with the S&P 500, the 50-day moving average has been a good guide for the uptrend in the Bloomberg Commodity Index. The 50-day has recently provided support near the breakout level at the 2018 highs. Above this support level, price is simply in a consolidation after a strong move to the upside that produced an extreme overbought reading in the 14-day RSI. Should support break, there is downside to the 82 level.
Sentiment Check
The CBOE S&P 500 Volatility Index (VIX) moved lower over the course of the week as the S&P 500 has moved to record highs. As we have mentioned, there is room to the extreme levels of complacency which have been reached in the past.
The CNN Fear & Greed Index has moved further into a fear position this week despite the S&P 500 and the NASDAQ trading at record highs.
Take-Aways
The S&P 500 and the NASDAQ have traded to record levels, but it is hard to make the case that sentiment is a concern. Under the surface of the equity market, the shift in leadership of late may be a function of falling yields but we highlight the fact that the 10-Year Note is simply in a trading range. Finally, commodities are at a key level.