Ether ready to rally?

Summary

1. The S&P 500 index still looks strong
2. Continuing weakness in growth stocks raises questions
3. Crypto market ready to rally?

Quick Recap: Previous Week

A week ago, the Kvarn Pulse newsletter was written on a rather ambiguous note. The S&P 500 index had settled right at its 200-hour moving average, which had turned almost perfectly horizontal. A virtually trendless state at the index level left room for a variety of interpretations.

Stock Market Remains Mixed

Over the past week, the stock market's overall look has turned positive once again. The S&P 500 index has stayed above its 200-, 50-, 20-, and 10-day moving averages. These averages have re-aligned into the right order for an uptrend, and the 10-day moving average is trending upward.

While the S&P 500 looks strong, a look "under the hood" reveals a few slightly concerning signs.

Technology sector, which served as the engine for the spring rally, seems stuck below its 200-hour moving average, which has turned downward.

Within the technology sector, we are seeing an interesting divergence.

The MAGS ETF, representing the heavily weighted Mag 7 companies, has climbed back above its 200-hour moving average, whereas the SMH ETF representing semiconductors has dropped below its own downward-sloping 200-hour moving average.

We have previously stated our view that we do not expect more significant moves from the S&P 500 until these technology segments align on the same side of their 200-hour moving averages. We are not seeing this yet, so we remain cautious regarding the S&P 500 index's upside potential for now.

The equal-weighted S&P 500 index has remained in an uptrend, but its momentum appears to have stalled over the past week. The equal-weighted index has not made new highs in two weeks.

The upward momentum of the Russell 2000 index, representing smaller companies, also seems to have stalled for the time being. The index has not hit new highs during July and has currently fallen below both its 10-day and 20-day moving averages.

Market breadth has looked quite strong so far. The percentage of S&P 500 stocks trading above their 50-day moving average reached new highs last Friday. Over the course of this week, this percentage has dipped slightly, but we can only see minor cracks in market breadth at this stage.

RPG/RPV ratio, which tracks the ratio between growth and value stocks, perked up late last week but has returned to roughly the same levels as when the previous Kvarn Pulse was written.

Our interpretation is that this ratio could be one of the most important stock market barometers in the coming weeks. The ratio is currently at a level where even a small move down would start to suggest a possible shift into a risk-off sentiment.

What Should We Make of All This?

In summary, after some minor intraweek moves, the stock market's outlook is largely the same as last week. At the index level, everything still looks good. However, we continue to see a few clouds hanging over the stock market, which right now appear to be darkening rather than clearing up.

At this stage, we are still willing to attribute the technology sector's relative weakness to a natural rotation following the heavily tech-driven rally in the spring. What causes some concern, however, is that this situation has already persisted for several weeks. Until market risk appetite clearly returns, we must keep the door open to the possibility that perhaps it will not return at all, and that we could be hovering around a more significant market top.

That said, we do not yet see signs of an immediate risk of correction risk.  VIX index has almost without exception stayed well below its downward-sloping 200-hour moving average over the past week, pointing to a lack of any real nervousness in the stock market.

The bond market's MOVE index, meanwhile, briefly visited above its upward-sloping 200-hour moving average during the week. We view this primarily as noise at this stage, but it gives us some reason to monitor whether this phenomenon might spread to the stock market as well.

Bitcoin Ready for a Rally?

While we haven't seen dramatic shifts in the stock market over the past week, the crypto market has offered some very interesting observations.

The price of the largest cryptocurrency, Bitcoin, has clearly perked up over the past week, climbing above $65,000. Bitcoin's price appeared to gain a boost from this week's lower-than-expected inflation figures, which are expected to reduce pressure on Federal Reserve interest rate hikes.

The next critical level to watch for Bitcoin is June local top around $67,500. If price climbs above this level, Bitcoin's trajectory will start looking quite promising.

We note with particular interest that the price of the second-largest cryptocurrency, Ether, is already trading above its own June peak.

On the daily chart, Ether's Relative Strength Index (RSI) has already climbed above 60, which has often served as an indication of an emerging uptrend.

It is quite an interesting turn of events that right now, Ether looks perhaps the strongest among the major crypto tokens. We are watching with great interest to see whether Ether's rally is a sign that the broader crypto market is ready to turn upward.

Gold still in a downtrend

One asset class that clearly has not been ready to turn upward is gold. Gold's price has consistently remained below the trendline drawn from previous local peaks, and we have not yet seen any upward momentum.

As a silver lining, one could note that gold's price has not hit new lows in recent weeks. However, until we see gold break above the $4,200 level, it is difficult for us to view its price action as anything other than an ongoing downtrend.

Summary

Overall, we can state that the stock market is displaying interestingly mixed signals right now.

As noted earlier, the internal dynamics of the stock market make us somewhat cautious at the moment. Until we see growth stocks begin to clearly strengthen, it is difficult for us to see the stock market ready for larger upward moves.

On the other hand, we have seen cryptocurrency prices clearly perk up. As long as this state of affairs persists, it is also difficult for us to see markets turning particularly risk averse either.

In this ambiguous environment, we advise monitoring the crypto market with heightened precision. Whichever direction market risk appetite turns next, we believe this pivot may first be visible in cryptocurrency price action.

After this week, Kvarn Pulse will go on a summer break and will return during the second week of August. In the coming weeks, you can follow our insights through our other articles and social media channels.

Kvarn Pulse wishes you a wonderful July!