Key Points
- Major U.S. Equity Averages Are Likely to See Continued Chop
- Global Equities Improve on a Relative Basis
- Rates Move Higher Across the Curve, a Headwind for Stocks?
- Commodities Are the Best Trend on Our Screens
- Dollar Can’t Break a Key Level
U.S. Equities
The S&P 500 staged a small rebound last week, but not before making another lower low in the current pullback from the early September high. The index continues to trade between the rising 40-week moving average and the 10-week moving average, which is beginning to turn lower. The key level to watch is 4,200, above which the structure of the long-term uptrend remains in place. However, as we wrote last week, the odds favor further choppy trading, especially with the price stuck between the moving averages.
The 14-week RSI remains in a bullish regime as it works off the overbought readings reached in early September.
The S&P Small Cap 600 had an uneventful week last week, remaining in the range that has marked trading since March. Small Cap bulls will point to the fact that the index closed above the 10 and 40-week moving averages after a test of the latter last week. Bears will focus on the fact that the 14-week RSI continues to move lower, signaling a lack of momentum. It is hard to have strong conviction in either the bull or bear case until there is a confirmed break from the current range.
On a relative basis, Small Caps are holding the break of the downtrend line and remain above support.
At the sector level, three groups stood out on the upside, while one was a clear loser:
- Energy – Continued leadership in the space, threatening the highs.
- Utilities – Retakes support, but a lot of work to do.
- Financials – Upside follow-through after last week’s breakout.
- Health Care – Pushing toward the bottom of the range, the laggard of the week.
Once again, the NASDAQ Composite Index made a lower low for the pullback last week. In this case, the low was in line with important support near the 14,000 level, just above the rising 40-week moving average. At the same time, the 10-week moving average is beginning to turn down. A potential bright spot in the near term is that the 14-week RSI is trying to stabilize near 50, keeping the indicator in a bullish regime.
The relative ration continues to roll over but is trading above key support.
U.S. Fixed Income
The 10-Year Note could not capitalize on the “bullish hammer” pattern left on the chart in the prior week, coming under pressure once again last week. For now, support is holding near the $131 level. Should that give way, a fast-moving to the $127 (and a moving higher in rates) is the most likely scenario. Regardless of near dynamics, below the 10 and 40-week moving average, the downtrend in price is likely to persist.
The 14-week RSI is moving lower once again. While a bullish divergence remains in play, it is simply a sign of a potential bottom until price responds, nothing more.
Across the curve, rates continue to move higher. Twos and Fives have accelerated to the upside after a retest of their breakout levels.
Commodities
The Bloomberg Commodity Index put in another strong week, closing further above the rising 10-week moving average. Strength is confirmed by momentum, with the 14-week RSI moving into an overbought position after breaking the declining trend line a few weeks ago.
On a relative basis, the index continues to outperform the S&P 500.
Within the commodity complex, the trends remain the same as they were last week:
- Precious Metals – near-term trend is bearish, but support has not been broken.
- Industrial Metals – holding near the recent highs, on the watch for a breakout.
- Agriculture –holding the break from the consolidation.
- Energy – a clear leader, trading near new highs.
Global Equities
The Global Dow rallied on the week to close just below the 10-week moving average while holding above the 40-week moving average. Here too, the 14-week RSI is moving lower as upside momentum continues to wane. Odds favor choppy trading in the near term.
On a relative basis, the Global Dow remains below resistance but continues to improve. A break of resistance would be a reason to become more constructive in equities outside the U.S.
The Dollar
The U.S. Dollar Index finished flat in a volatile week of trading. Resistance near 94.75 remains the key level to watch on the upside as the index trades above the rising 10-week moving average. The 14-week RSI has been making higher lows of late, but we want to see overbought readings to have confidence that the index will hold a breakout should one occur.
Take-Aways:
Choppy trading in the equity market is likely to persist with many of the major averages stuck between the 10 and 40-week moving averages. The back-up in interest rates across the curve is a persistent theme that is not helping equity bulls in the short term. Commodities remain the best trend of all the asset markets that are currently on our radar, and we would expect this trend to strengthen if the dollar is not able to build on recent strength and break above key resistance.