Key Point
- Software Breaks to New Highs
- NASDAQ Reaches Record Levels, S&P 500 is Just Below
- Small Caps Consolidate
- Crude Oil Remains the Commodity Leader
- Sentiment is Not Frothy
Chart in Focus
On June 8th, we pointed out signs of life in the Technology sector and opined that we would expect to see Software take a leadership position and now that does appear to be the case. This week, the S&P 500 Software Index broke to a new high on an absolute basis, trading above the rising 50-day moving average. At the same time, Software continues to improve relative to the S&P 500. The ratio is above the 50-day moving average and has moved above April highs, increasing the odds that outperformance will continue.
Mid-Week Market Update – United States
For the S&P 500, the 50-day moving average provided support to near-term selling pressure once again. The index is knocking on the door of another all-time high. Price-based support is near the 4,100 level, unchanged from last week. Should that level be broken, the 200-day moving average will likely be tested.
We note that during the brief test of the 50-day moving average, the 14-day RSI remained in a bullish regime, holding support near the 40 level. At the moment, the one negative callout is that the RSI has failed to confirm recent price highs. This is a negative divergence that would be confirmed with a break of support.
The S&P Small Cap 600 Index continues to trade in the consolidation that has been in place March, after failing to follow through on record highs set in early June. The index has been testing the 50-day moving average, which is still rising gradually. Support is at the bottom of the current range, near 1,300. As with the S&P 500, recent weakness did not serve to shift the momentum regime, as the 14-day RSI held bullish ranges.
On a relative basis, Small Caps have moved below the, now flat, 50-day moving average.
The NASDAQ Composite Index traded to a new high yesterday after not succumbing to the same degree of selling pressure as the S&P 500 and the S&P 600 last week. The NASDAQ is above the 50-day moving average and the 200-day moving average, both of which are rising. Price-based support remains near 13,000, a level that will soon include the 200-day moving average. The 14-day RSI has not become oversold while the index has consolidated since February; we would like to see this indicator become overbought to confirm recent strength.
Relative to the S&P 500, the NASDAQ is above the 50-day moving average. We look for a break of the interim highs to signal that the NASDAQ is regaining a leadership position.
The 10-Year Treasury Note has been volatile leading up to and following last week’s FOMC meeting last week, but not much has changed in terms of the trends. The Note remains in a range, with support at the 2019 highs and resistance at the $134 level. The Note is back below the 50-day moving average and remains well below the declining 200-day moving average.
The 14-day RSI is in the middle of the range, confirming the price action.
Drilling down on the commodity complex, of the four that have been receiving a lot of attention of late, Crude Oil is bucking the trend of weakness. Copper has pulled back from record levels and is now testing support. Gold is pulling back after failing to break the string of lower highs since peaking last August. Lumber remains in a freefall with few signs of stabilization of yet.
Sentiment Check
As equity markets in the U.S. trade at/near record levels, the CBOE S&P 500 Volatility Index (VIX) continues to grind lower. The index remains in a downtrend since peaking in March 2020. While trading near the lowest levels since the onset of the pandemic, the VIX is still not near the levels of complacency that were reached for much of the 2017 – 2019 period.
While some may infer from a declining VIX that greed is the dominant emotion in the market currently, the CNN Fear & Greed Index sends the exact opposite message. This index is in a fear position at 32, down from a neutral reading of 51 last week. Certainly, an interesting dynamic considering the current position of the S&P 500 relative to record levels.
Take-Aways
This is a market that has something for everyone. Bulls can point to the fact that equities in the U.S. are trading at or near record levels while the 10-Year Note (a haven asset) cannot hold a bid. At the same time, the Fear & Greed Index is in a fear position. Bears can highlight the momentum divergence on the S&P 500 as well as the declines in some of the major commodities of late. As is always the case, we defer to price, where the trends remain to the upside, while being mindful of the bearish arguments which would be confirmed with breaks of key support levels.