The Chop Continues: Markets Showing Signs Of Stress

Markets continue to chop during this seasonally weak period and have made no progress over the past 30 days. Price patterns of the key US Equity indexes are holding up at key moving averages, but there are signs of stress that should not be ignored.

Small Caps (Grandpa Russell: ) which represent the broadest measure of the US economy touched the lowest levels of a 7-month trading range, and was down almost 2% for the week.

Other signs of stress include poor momentum readings, weak Risk Gauges, rising Hindenburg Omen levels (see chart below and weekly highlights for details), and sector rotation showing risk off as utilities () hit new all-time highs.

SPY Daily Chart

Meanwhile, short term, equities are mean reverting, bouncing off oversold conditions and key moving averages. This could offer an opportunity to take some money off the table at higher levels and/or tighten stops if last week’s lows are violated.

On a more positive note, growth stocks are holding firm relative to safer value plays which is why the big picture is muddy at best.

If you’re looking for a way to identify the stocks and sectors that are most likely to explode higher (some already have, e.g., , , , , and more), after last week’s mini-correction.

The Week’s Market Highlights

• Risk Gauges were showing Risk-Off as of the end of the week.
• IWM tested the lower Bollinger® Band on both price and Real Motion, getting a bounce off oversold levels back over the 200-DMA.
• , , and all tested their 50-DMAs and bounced, keeping the long-term trend intact. However, the divergence of momentum from price in these indices was still in effect
• If the above 3 indices fail their 50-DMAs it would be a sign of an interim top
• Market internals hit moderately oversold levels according to the McClellan Oscillator and Real Motion.
• The Hindenburg Omen indicator was starting to show an increased potential for market collapse. As you can see from the chart above and in Big View here, the market internals were at odds with the SPY at new highs. While we’ve created a proprietary formula for this indicator, you can find a good description of what it’s measuring under the chart here.
• A more simplistic, but equally as powerful indictor as the Hindenburg Omen is the new high/new low ratio. It too was deteriorating quickly in SPY.
• Volume patterns were showing a mixed bag, with overall accumulation days matching distribution days over the last two weeks across all 4 indices. However, over the past 30-days the major indices have made virtually no progress, with IWM performing the worst; down 2%.
• Soft Commodities () was stuck in a long-term trading range and losing momentum, while () was starting to mean revert, bouncing off oversold levels holding support at its 200-DMA.
• () was breaking down hard and looked for support at its 200-DMA.
• Despite taper talks from the Fed, Long Bonds () had price creating a channel/wedge formation in recent weeks, looking for a potentially significant breakout if price gets above the $152 level.
• Growth () was showing strength as Real Motion had the 50-DMA moving back over the 200-DMA, while Value () was doing the inverse.
• Biotech () continued to sustain its Bullish phase, while all the other members of the Modern Family were in Caution phases.
• Emerging Markets () were submerging, breaking critical swing points and looking oversold on a short-term basis.
• Utilities (XLU) and Healthcare () were the two leading sectors this past week, with Oil (USO & ) completely collapsing with a -8.5% drop over the last 5 days, another Risk-Off signal.
• The () was looking slightly overbought short-term, but longer-term trend turned bullish.

The Week’s Cryptocurrency Highlights
(by Holden Milstein)

• (BTC) saw its 10-DMA successfully get back over the 200-DMA for the first time since May 24, with price, at time of writing, at $49,500. Support was at $45,000 and resistance at $50,000 which will likely be passed by Monday morning.
• (ETH) has been virtually flat over the last 7-days, but managed to hold support at $3,000 during the midweek cryptocurrency market drawdown, now sitting just below resistance at $3,300.
• The Altcoin market appeared to be in full bullish mode, with several lesser known projects like (SOL) and (ADA) reaching new all-time highs.
• Bitcoin’s market dominance (percentage of overall cryptocurrency market cap) dropped to 44% from 70% at the beginning of 2021, signifying a longer term diversification within the crypto market.