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Key Points

  • Small Cap Technology is Breaking Out
  • Discretionary vs. Staples Holds Near the Top of the Range
  • Lumber/Gold Ratio Battles Support as a Bullish Divergence Remains in Play
  • Small Caps Near Moving Average Resistance vs. Large Caps
  • Growth over Value Remains the Higher Probability Trend

Chart in Focus:

We have written about the strength in the Technology sector over the past few weeks. Today we highlight another datapoint that confirms this strength. The S&P 600 Information Technology Index is in the process of breaking up and out of a consolidation that has been playing out since February. There has not been a lot to like in the Small Cap universe over the past six months, but a key sector breaking to new highs will always get our attention.

Relative to the S&P 500, Small Cap Technology has broken above the 50-day moving average and the downtrend line. These are the fist steps in establishing a leadership position.

The following relationships can help give us a sense of the level of risk appetite on the part of investors.

High Beta vs. Low Volatility

The ratio of the S&P 500 High Beta Index relative to the S&P 500 Low Volatility Index remains trapped between the rising 200-day moving average and the declining 50-day moving average. As the moving averages pinch, there is likely going to be a resolution soon. The 14-day RSI is in the middle of the range, confirming the current consolidation. The bullish divergence that we highlighted last week would be confirmed with a break above the 50-day moving average.

Consumer Discretionary vs. Consumer Staples (Equal Weight)

The ratio of Consumer Discretionary stocks relative to Consumer Staples stocks remains above the rising 50 and 200-day moving averages and support at the 2018 highs. The 14-day RSI has made another lower high, a divergence with price which is trading near the upper end of the consolidation range.

Copper vs. Gold

The Copper/Gold ratio remains in its consolidation, which has been playing out since March. The ratio is stuck between price-based support and resistance as well as the 50 and 200-day moving averages. The 14-day RSI is in the middle of the range but has been making lower highs since March.

Lumber vs. Gold

The Lumber/Gold ratio is fighting to hold price-based support, below the 50 and 200-day moving averages. The bullish divergence of the 14-day RSI remains in place as another higher low was established this week. We want to see this divergence confirmed with a break of the 50-day moving average.

Small vs Large

The ratio of Small Caps to Large Caps has staged a bit of a rebound over the past week. The move higher has taken the ratio to the declining 50-day moving average, which is below the 200-day moving average. The 14-day RSI is in the middle of the range after flashing a bullish divergence. We are still waiting on confirmation via a move higher in price.

Growth vs Value

The Growth/Value ratio for the S&P 500 has moved higher this week as it trades above the short-term breakout level and the 50 and 200-day moving averages. The 14-day RSI is in a bullish regime, trading just below overbought levels after breaking its recent downtrend.

Take-Aways

These key themes and trends remain largely as they were last week, many choppy consolidations. Divergences are in play but have not been confirmed. In fairness, this is the last official week of summer when trading is usually lackluster and conviction levels are low. Perhaps investors are waiting for the results of the August non-farm payrolls report which will be released today. Regardless, the S&P 500 and NASDAQ 100 continue to grind higher, keeping the best course in action as broad exposure to bullish equity trends.

 

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.