I’m going to begin with my favorite chart in the world, that being of palladium futures. What a beautiful test of support at the rising 200 week SMA, trend line resistance and 50% fibonacci retracement level. It doesn’t get much more textbook than that. As you all probably know, I dislike all precious metals from a structural perspective except for palladium.
This chart is measuring the performance of microcaps, small caps, mid caps, the S&P 500, the Dow and the Nasdaq 100. As you can see performance is strongest in large caps and gets progressively worse as you move down the market capitalization spectrum. Not normally what you want to see if you’re long equities as this represents a defensive stance in the market and a lower risk appetite on the part of market participants.
As you can see by the chart below, microcaps have lagged and are now breaking important support. The daily moving averages are rolling over as well, signaling that the trend is in the process of reversing and that rallies are likely to be sold. Additionally, momenutm continues to make lower highs and hit oversold levels, again not a good sign if you’re a bull. The measured move of this breakdown is 11 points, bringing us down to about 58, but there is some support around $63.75 that should provide some sort of a bounce.
Small caps in a similar situation, looking to confirm a double top this week with the measured move targeting $94. Moving averages are rolling over and momentum is hitting oversold levels and remaining in a bearish range. The first target is at $99, the prior breakout area and 161.8% fibonacci extension from the high to low of this recent range. Not a great sign for the broader market if microcaps and small caps are breaking down, risk appetite is obviously a bit weak.
This chart of the Nasdaq 100 shows a strong uptrend, but recent weakness characterized by a bearish momentum divergence, range expansion and a rounding top in price. Obviously this is one of the strongest indices YTD and has a ton of support below at $94 and $91. I think that this is just a retest of support and until we see this $91 level break, the trend remains higher.
Here we are looking at the relative performance of microcaps versus the S&P 500. Clearly we had a false breakout in early 2014 and are paying for it since. The ratio has now reached an important support level both in price and momentum. If this ratio fails to hold support and microcap weakness continues, we could see further deterioration in the broader market.
This is a 20 year weekly chart of the S&P 500 versus the Russell 2000. As you can see we recently put in a double bottom on the back of a positive momentum divergence and have now broken out. The point of this chart is to highlight that maybe we are likely to see large cap outperformance continue for a longer time than most people think, given that this ratio has a lot of room to run before hitting long term resistance. Again, not predicting, but something to be aware of here when putting the recent broader market weakness into a long term context.
Next I want to highlight consumer staples as they break out relative to the S&P 500. After putting in a beautiful positive momentum divergence, price has broken through the downtrend line and is confirming higher. There is minor resistance above but the main target remains above .24 at the prior breakdown area. Speaking of consumer staples, they are also attempting a long term breakout relative to consumer discretionary stocks. Obviously this is a long, long, long term chart, but it’s something to be aware of when viewing the big picture of the asset allocation shift occuring across all markets. Consumer staple strength continues to add evidence that we will continue to see a more defensive stance in the market.
Nothing screams risk-on like long term treasuries outperforming all other types of credit by a wide margin, right? Again, this represents the defensive tone we’ve been seeing for quite some time in the markets.
As you can see from the chart below, long term treasuries are breaking out of a 7 year downtrend line relative to junk bonds. After a long base at support and a bullish momentum divergence, we have now confirmed a breakout and it looks like the ratio has room to run here. Again, not a great sign for risk appetite.
TIPS attempting a long term breakout against junk bonds? Clearly it needs some time, but the ratio is at long term support and putting in a bullish momentum divergence as it hugs the resistance line. It’s a bit early to get all bulled up about TIPs, but I think it is an interesting development and one to watch over the next few months.
There were a few more charts I wanted to share, but for now I think this paints a picture of some things I found interesting today and over the past few weeks. If you’re a bull on US equities, I have to say that there are a lot of things suggesting risk-off type behavior and a more defensive stance to asset allocation, as there has been relatively all year. In order for me to get bullish on US equities in the short term I’d want to see breadth improve, small caps and micro caps close back above support, and equal weighted sectors start to catch up to market cap weighted sectors so that we have evidence of more stocks participating. Also, with treasuries continuing to outperform and the defensive sectors of the S&P 500 leading, I think the market continues to be in a neutral/bearish stance until we get evidence of the things I listed above.
Again, just my thoughts today. Any questions feel free to contact me.