Mid-week market update: While the equal-weighted S&P 500 has been in a well-defined uptrend, which in intermediate-term bullish, other major U.S. equity averages have been mired in trading ranges, which reveal a degree of uncertainty about short-term direction. In addition, the VVIX, or the volatility of the VIX, remains above the 100 level indicating continued uncertainty.
It’s time to look under the hood and draw some lines in the sand for insights into short-term direction.
Moving Average Support
Let’s start with the NASDAQ 100. This index decively broke down below its 50 dma, and it’s approaching its 200 dma. A decline below its 200 dma would be very bad news. Already, it’s violated relative support, indicating continued weakness (bottom panel).
Small-cap stocks have been leading stock prices upward. Even though the Russell 2000 is range bound, relative performance has been strong (bottom panel). Past declines have mostly been arrested at the 50 dma. Will it be different this time?
While the near-term price pattern of the small-cap Russell 2000 is encouraging, small-cap breadth is concerning. The Russell 2000 Advance-Decline Line is unavailable, the accompanying chart shows that while the small-cap S&P 600 is making new highs, its A-D Line remains below its all-time high. I interpret this as a warning that small cap leadership may not be sustainable in the short run.
February OpEx
This week is option expiry week. Jeffrey Hirsch at Almanac Trader pointed out that February OpEx Friday tends to have a bearish seasonality bias. Even worse, the following week also has shown a slight bearish tone.
Geopolitical Risk
Lastly, the Polymarket betting odds of a U.S. attack on Iran has soared after the second round of U.S.-Iran talks yesterday. If the attack decision is made, news reports indicate that the U.S. is preparing for a multi-week conflict, which is likely to spike oil prices and spark a regional conflict that unsettles risk appetite. Frankly, I am astonished that risk appetite indicators haven’t reacted to the heightened odds of an attack.
Sentiment Warnings
In the meantime, the latest BoA Global Fund Manager Survey shows that respondents are taking an elevated level of risk.
Investors may also be seeing the political version of the contrarian magazine cover indicator. President Trump boasted about the S&P 500 briefly reaching 7000 before retreating on an intra-day basis in late January (see Did Trump Jinx S&P 7000?). The index never closed at that level again. More recently, Attorney General Pam Bondi deflected a question about the Epstein files by referring to the Dow at 50000.
In conclusion, most major U.S. stock averages are range bound. While I am keeping an open mind about short-term market direction as I await either an upside or downside breakout, my inclination is to stay cautious.