The Good, the Bad,
and the Ugly

Key Points

Mid-Week Market Update – United States

After a valiant effort to hold short-term support on Monday, the S&P 500 sliced through it yesterday to bring the more important 4.550 level into play. This price point lines up with the rising 50-day moving average, just above the rising 100-day moving average. These are now the important lines in the sand for the broader market’s bullish trend. Bulls want to see support hold at 4,550 and then see the 4,630-level retaken to set the stage for a continuation of the uptrend.

For now, the 14-day RSI remains in a bullish regime, holding above the 40 level during the current bout of selling pressure.

For the S&P Small Cap 600, the past three days gave us three ugly events; call them a bearish trifecta:

• Lost the breakout level after 8 months of consolidation.
• Lost the 50-day moving average and failed to rally on Monday.
• Lost the 100-day moving average.

Now the index sits in the middle of the consolidation that it worked so hard to overcome. At the same time, the 14-day RSI is near oversold levels after breaking the rising trend line. Finally, the group is pushing on support Relative to the S&P 500. While we can’t rule out an oversold bounce, we find it hard to become excited about Small Caps until they prove that they can hold above 1,400.

The NASDAQ 100 remains the “belle of the ball” in U.S. markets. The worst that we can say is that it is currently in a consolidation. However, the trend is still bullish, with the index above the rising 50 and 100-day moving averages and support near 15,600.  The 14-day RSI is in a bullish regime and has worked off its overbought condition.

On a relative basis, the NASDAQ 100 is breaking to new highs. This is leadership.

On the most recent episode of “Who Charted?” we highlighted the fact that bonds, especially Treasuries, were a key market to watch in the days/weeks ahead. The 10-Year Note has broken through price-based resistance as well as the 50-day moving average as investors seek haven from the choppy equity seas. The 100-day moving average is just overhead, and a move above that indicator could set the stage for further upside.

The 14-day RSI has been giving us a bullish divergence, and we are now seeing price respond to it. Breaking out of the current bearish regime will add a momentum confirmation to bullish price strength.

Though less discussed than the breakdown in Small Caps, the collapse of commodities is every bit as important. The Bloomberg Commodity Index has lost its 50-day moving average, price-based support at 97, and the 100-day moving average. At the same time, the 14-day RSI has moved into an oversold position for the first time since April 2020. The burden of proof is now on the bulls to sustain a bullish trend.

On a relative basis, the trend is under pressure below support and the 50-day moving average. The 2021 lows are now in play.

Under the surface of the commodity market:

• Copper – Tests and holds the downtrend line above support; this is a key level
• Gold – Falling out of the range to the downside; $1,720 is in play.
• Lumber – Moving through resistance; above $800 is bullish.
• Crude Oli – Breaks below $75, changing the trend from bullish to bearish.

Sentiment Check

The CBOE Volatility Index (VIX) has spiked as equities have come under pressure. This is to be expected. However, we note that while the S&P 500 made a lower low yesterday, the VIX made a lower high. This leaves a divergence in play and sets the stage for a near-term bounce in the equity market.

The CNN Fear and Greed Index moved from a “greed” reading of 62 last week to a “fear” reading of 26 this week. The indicator is back toward levels that have tended to provide a contrarian, bullish tailwind to equities.

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 24, 2021.

The spread has moved below the 13-week moving average, sending the Z-score below zero. While not at an extreme downside level, we can no longer make the case that this indicator is a headwind for equities.

Take-Aways:

The good, the bad, and the ugly line up like this:

• Good – NASDAQ 100 and Sentiment
• Bad – S&P 500, if support breaks
• Ugly – Small Caps and Commodities

It would not be a surprise to see equities react to overly bearish sentiment and a lower high in the VIX by staging a near-term rally. Small Caps have sustained technical damage and have a weak relative trend, so look elsewhere. The NASDAQ 100 is the best game in town as investors seek the safety of Mega Cap growers.

Rates are key; further strength in the 10-Year will only help the NASDAQ 100 . At the same time, an oil-led selloff in commodities must call the economic growth narrative into question.