Mid-week market update: As the bulls and bears battle it out during this phase of consolidation, it’s time to set out some lines in the sand to see which side has the upper hand. The accompanying chart shows the S&P 500, the equal-weighted S&P 500, and the Russell 2000, along with their respective rising trend lines (dotted lines), their 50 dma, and levels of likely support.
Here are my takeaways:
- The S&P 500 and equal-weighted S&P 500 are testing their rising trend line while the Russell 2000 has been below the trend line for several sessions.
- All three indices are trading just above their 50 dma initial support.
- The S&P 500 can find decent support at about the 6500 level, and the equal-weighted S&P 500 and Russell 2000 are very close to their 50 dma and secondary support levels. Violations of those support levels opens the door to deeper price weakness.
In other words, there are few clear signs of bullish or bearish dominance.
Stabilization and Consolidation
However, I am seeing signs of factor stabilization and consolidation. The relative performance of the Manificent 7 and the equal-weighted S&P 500 were roughly flat in the past month, indicating limited signs of broadening breadth.
Risk appetite indicators have also stabilized. Credit risk appetite, as measured by the relative price performance of junk bonds, took a hit with the “cockroaches” comment, but trade sideways in the last week. The relative performance of consumer discretionary to consumer staple stocks also displayed a similar pattern of drop and consolidation.
Not Out of the Woods
The technical backdrop can be broadly described as constructive consolidation after a series of negative divergences. However, Q3 earnings season is just starting and anything can happen. We have a clusters of Hindenburg Omens for NASDAQ stocks, which is a warning sign of a possible air pocket for large cap growth stocks.
As well, investors can look forward to the CPI report Friday, the FOMC and the APEC meetings next week as sources of possible volatility. The VVIX, which is the volatility of the VIX Index, remains above the critical 100 level, which I interpret as a backdrop of elevated risk levels.
Some interesting observations:
1. Leading stocks like TSLA (10/2), NVDA (10/10) and PLTR (10/3) have not made recovery highs as QQQ’s churn at these levels.
2. Sometimes the most speculative area of the market sees a sharp pull back before the whole market starts to get weak. We are seeing air come out of gold, silver and bitcoin.
3. The VIX and VXN are holding above their previous lows.
All in all the fat lady is on the stage. We now need a good earnings report of a leading stock and the stock to react adversely. When it happens you will hear the sound of music.