Key Points

  • S&P 500 Continues to Pause, Short-Term Support Established
  • Small Caps Flag but Hold Above the Breakout Level
  • 10-Year Note Fades from a Key Moving Average
  • Commodities Hold Support but the Relative Trend is Suspect
  • Sentiment Is Still More Greedy than Fearful

Mid-Week Market Update – United States

The trend for the S&P 500 remains bullish, above the rising 50 and 100-day moving averages. However, the short-term pause/consolidation that we hinted at last week continues to play out. Last week’s low near 4,630 gives us an initial support level for the consolidation, while more important support continues to be at the 4,545 mark. The 14-day RSI sits just below an overbought condition and in a bullish regime, lending momentum confirmation to the price action.

The S&P Small Cap 600 Index is waving the flag; the “bullish flag,” that is. After breaking above resistance and out of the consolidation that has been in place since March, the index is pausing in what is known as a bullish flag pattern. It is encouraging to see the index hold above the breakout level and not quickly retreat. The 1,400 mark is important support. Below that, the 50 and 100-day moving averages come into play. Above these levels, the bulls are in control. Momentum continues to confirm price strength, with the RSI in a bullish regime.

If we wanted to poke holes in the Small Cap story, we would point out that we have yet to see a relative breakout that would signal that the group is taking a leadership position. The ratio is having a hard time breaking through resistance as it sits just above the rising 50-day moving average.

The NASDAQ 100 Index also remains in a small consolidation pattern, presumably taking a breather after sprinting to record highs recently. The trend is bullish, with the index above the rising 50 and 100-day moving averages and important support at the 15,600 level. As with the other averages, momentum confirms bullish price action; the 14-day RSI is just below an overbought condition.

On a relative basis, the NASDAQ 100 remains above the 50-day moving average but has not been able to make a decisive break above the September highs.

For the 10-Year Note, it is become more difficult to argue that the October lows were a “false breakdown.” We had made the case that a near-term bounce could not be ruled out but that if the Note was below the 50 and 100-day moving averages, odds favored lower prices; this is what has played out over the past few weeks. Now, those October lows have become extremely important. Holding them sets the stage for a base-building process. Breaking below signals that the downtrend is resuming. Momentum is with the bears as the 14-day RSI remains in a bearish regime.

Hold the Line! Commodity bulls have stepped up where they needed to. The Bloomberg Commodity Index has found support at the breakout level that lines up with the rising 50-day moving average. The rising 100-day moving average will come into play if price cuts below the breakout level. The 14-day RSI is doing its part, holding in a bullish regime to keep momentum to the upside.

The relative trend is at a key inflection point as it tests support while holding below the 50-day moving average. While the ratio continues the pattern of higher highs and higher lows that has been in place for most of this year, Commodity bulls want to see a quick reversal from current levels to have confidence that outperformance will last into 2022.

Within the commodity space, Gold and Lumber are making a push:

  • Copper – Holding support in the $4.30 – $4.40 zone, but trading has become choppy.
  • Gold – Breaks key resistance at the $1,830 level, bullish above that mark.
  • Lumber – Taking another run at the $650 resistance level; will it hold this time?
  • Crude Oil – Consolidation continues; $75 is the key level for the bulls.

Sentiment Check

The CBOE Volatility Index (VIX) has ticked down slightly over the past week but is holding above the 15 level for now. Last week’s small spike appears to have kept with the pattern that has been in place for much of this year; flare-ups in the VIX have been short-lived and have peaked at lower levels.

The CNN Fear & Greed Index remains in a position of “Extreme Greed” this week, moving from 86 to 82.

The American Association of Individual Investors publishes a weekly survey of their members to find out if they are bullish, neutral, or bearish on the market. In this chart, we highlight the spread between those who are bullish and those who are bearish. We add a 13-week moving average (blue) and include the 13-week Z-Score. The data is as of November 10, 2021.

The spread has been moving higher since bottoming in September and is approaching the highs that have been seen this year. At the same time, the Z-Score is also near the highs that have been recorded since 2019. This data lines up with the view that we have been expressing for the past few weeks, namely that sentiment is not currently a tailwind for equities.

*A thank you and welcome to Potomac’s new Research Associate, Drew Wells, who highlighted this data in our conversations this week.

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.