The major averages in the U.S just turned in their worst weekly performance since the pandemic. As key support levels have been broken, the burden of proof has shifted to the bulls. It would not be a surprise to see trading remains choppy in the near term, but there are some indications that the pressure may be short-lived and will open opportunities over the next three months of trading. The VIX is reaching levels where a contrarian bullish stance begins to make sense, and that view would strengthen should the VIX move beyond 30.
Away from equities, there are continued signs of a shift toward outperformance on the part of global equities vs. the U.S. Commodities remain a compelling trend. Still, we struggle to find a good answer to the question, “why now?”
Finally, while we are anti-narrative, we are mindful that they drive trading for many investors. One that we can see unfolding over the next few months is that the Fed may be tightening into a slowing economy. The bond market holds the keys here, and the curve continues to flatten.
U.S. Equities
The S&P 500 closed below the 40-week moving average for the first time since June 2020 as the selling pressure that greeted the new year has not abated. At the same time, price support at 4,500 has given way. The 10-week moving average is now moving lower.
The 14-week RSI is moving lower, and the divergence that we highlighted in these pages two weeks ago has been confirmed, as price has broken support. The RSI has also moved to its lowest level since October 2020.
There is no way to sugarcoat it; last week was the worst week for the S&P 500 since the pandemic. We looked back to 1980 and noted that there had been 12 instances where the S&P 500 closed the week by crossing below the 40-week moving average while also losing more than 5%. Over the next month of traded the median gain has been 0.46%, with a hit rate of 54.55%. This is worse than the baseline metrics of 1.26% and 64.04% for all one-month periods since 1980. However, over the next three months, the S&P 500 has been higher 90% of the time for a median gain of 6.44%.
While we would not be surprised to see a bounce in the near term, the burden of proof has shifted to the bulls.
After twice not being able to hold a breakout, the S&P Small Cap 600 has fallen to the low end of the trading range that was in place for all late year. The 10-week moving average is on the verge of crossing below the 40-week moving average for the first time since the onset of the pandemic. The 14-week RSI is moving lower and has broken support.
As with the S&P 600, the S&P 600 crossed below the 40-week moving average while also losing more than 5% on the week. Since 1998, there have been 16 cases where this has played out. Over the next three months, the S&P 600 has outperformed the S&P 500 53.33% of the time, and median outperformance has been 0.01%. The relative trend is fading from resistance; perhaps a base can begin to build?
*Please see our Small Cap Deep Dive Note on Wednesday for a more granular look at the group.
Not to be left out, the NASDAQ Composite Index moved through the 40-week moving average and price-based support last week. The 10-week moving average has also begun to roll over. Momentum is shifting in favor of the bears as the 14-week RSI breaks below 40 for the first time since March 2020.
Two weeks ago, we highlighted that the bears were beginning to take control of the relative trend. This week, we note that support has completely given way and the burden of proof is now squarely with the bulls.
Here too, we look at the scenario of crossing below the 40-week moving average while also losing more than 5% on the week. It has happened 18 times since 1978. Over the next three months, the Composite has generally been higher but has lagged the S&P 500 52.94% of the time.
With big moves to the downside over the past week, sentiment has turned bearish. The S&P 500 Volatility Index has spiked above 28 and has a 50-period z-score of 2.07 (it is more than two standard deviations from the 50-day average). Since 1990 there have been 231 times that the z-score has crossed above 2. Over the next three months, the S&P 500 has been higher 70.61% of the time for a median return of 3.99%. This compares to a baseline three-month return of 3.05% and a 70.23% hit rate.
U.S. Fixed Income
While we have had a downside bias to the 10-Year Note (upside bias to yields), if price is below the 10 and 4-week moving averages, we would not be surprised to see some stabilization as the next support level, near $128, is tested. This test plays out as the 14-week RSI makes another higher low and has held above 30. It would not be a surprise to see a move back to the moving averages.
Note that the yield is holding above resistance at 1.75%. That is a key level to watch as price tests support.
Across the curve, flattening remains the theme as rates at the short end move higher (seeming to agree with the Fed) while rates come down at the long end. This move at the long end of the curve speaks interesting in that it has the potential to spark a debate among investors: is the Fed going to tighten into a slowing economy? We are not interested in the specific narrative per se, but we are mindful of headlines that these prevailing trends could produce.
Global Equities
The Global Dow has checked back to support at the breakout level as it was not immune to the selling pressure that attacked risk assets last week. The index has held above the rising 10 and 40-week moving averages, and the 14-week RSI continues to trade in a bullish regime. There is a divergence in play, but it has not been confirmed.
As we discussed two weeks ago, the relative trend is most compelling to us as it has begun to work higher. There is a bearish to bullish shift playing out that would be confirmed with a break of resistance.
*Please see our Weekly Scanning Report for comments on Global Regions and Country-specific ideas.
Commodities
The Bloomberg Commodity Index has been a solid trend for nearly two years. While some are only now catching on, we noted on Friday that this might not be a compelling time chase based on the extreme RSI reading on the relative trends. Here we can see the absolute trend above the 10 and 40-week moving averages but note that the 14-week RSI has made another lower high.
There is no denying that the trend is bullish; the question is, do you add here?
Under the surface, the technical picture appears to agree that this may not be the best place to add exposure.
- Precious Metals – Stuck in the range.
- Industrial Metals – Hitting the underside of the trend line.
- Agriculture – Nearing prior highs
- Energy – Nearing prior highs.
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