Mag 7 holding up the market?

Quick recap: previous week

A week ago, the Kvarn Pulse newsletter was written in a rather cautious mood. The S&P 500 index had begun to give slight warning signs of a downtrend and had dropped to just above 7,600 points. We identified that exact level as a critical watershed.

S&P 500 under 7600

The overall complexion of the stock market has remained bearish over the past week. The S&P 500 index is still below both its 10-day and 20-day moving averages. The 10-day moving average is below the 20-day moving average, and both of these averages are in a downtrend.

The US Federal Reserve's decision on Wednesday to raise rates pushed the stock market slightly lower. Currently, the S&P 500 index sits just barely below 7,600 points. As we have highlighted previously, this level appears to be a rather critical watershed. If the index does not return above this level quite soon, it will become increasingly difficult to hold on to any kind of bullish interpretation.

If we look "under the hood" of the S&P 500 index, we can see that the index appears interestingly divided.

The largest technology companies look quite strong at the moment. The price of the MAGS ETF, which invests in the Magnificent 7 mega-cap companies, has turned into a strong uptrend over the past few weeks and is currently near its May record highs.

Outside of the Mag 7 companies, the situation looks very different.

The price of the XMAG ETF, which invests in the S&P 500 companies excluding the Mag 7, has been clearly declining for the past month. The price has fallen below its 10-day, 20-day, and 50-day moving averages. Furthermore, the Relative Strength Index (RSI) has dropped below 40, which is often considered a fairly clear sign of a downtrend.

If we look at the Equal Weight S&P 500 index, which removes the overweighting of the mega-caps, we can see that it also looks quite weak. The index is below its 10-day, 20-day, and 50-day moving averages, and the 10-day average has already clearly crossed below the 50-day average. The RSI has already dipped to around 35, indicating clear weakness.

With a little oversimplification, one could say that right now the Mag 7 group is strong while almost the entire rest of the S&P 500 index is in a downtrend.

The clearest exception to this generalization is the energy sector, which has continued its rise to new record highs on the back of rising oil prices.

Among industry groups, software looks fairly robust.

Therefore, the Mag 7, the energy sector, and software still appear strong.

Outside of these engines of the stock market, however, the situation currently looks quite weak.

The overall state of the S&P 500 index is well illustrated by the fact that only about 30 percent of its stocks are currently above their 50-day moving average. This proportion has roughly halved over the past month.

We are therefore in a situation where the strength and heavy weighting of the Mag 7 in the S&P 500 seem to be currently supporting the entire index reasonably close to its record highs. On the other hand, outside of the mega-caps, the S&P 500 index appears to have already turned into a correction.

The key question for the coming week is naturally: will the momentum of the Mag 7 companies be enough to keep the S&P 500 index afloat until the rest of the stock market finds its bottom? Or will we next see the prices of the Mag 7 companies also bend, pulling the entire S&P 500 index into a more pronounced correction?

We do not yet know the final outcome. Right now, however, we are seeing signs that force us to maintai a rather cautious stance for the time being.

The VIX index has remained in an uptrend. The VIX is currently sitting just above its upward-sloping 200-hour moving average.

The absolute readings of the VIX remains reasonably low and are not in themselves typical of major corrections. We are, however, paying attention to the upward trend that has now lasted for nearly two weeks, and as long as it continues, we will monitor the situation with heightened caution.

Further cause for caution is provided by the bond market's MOVE index. As is often the case, the MOVE index began its ascent in August slightly earlier than the VIX. On a daily chart, it has already climbed above all its moving averages, and these averages have aligned in an order indicative of an uptrend.

In addition to these observations, we note that the Kvarn X Early Warning Indicator has turned from yellow to red in just a few days. This tells us that there are currently several factors in the market that are often seen in connection with corrections.

In summary, we note that right now we are seeing several warning signals in the stock market, which force us to maintain a cautious stance in the short term.

We fully understand that our concerns might seem premature. After all, the S&P 500 index is currently only about 3.5 percent away from its peak levels. We would remind you, however, that often the best time to turn cautious is before major downward moves have happened, not after them.

Gold price in a downtrend

The price of gold has continued to be slightly sluggish over the past week. The price is currently below both its 10-day and 20-day moving averages, and the 10-day average is clearly below the 20-day average.

For now, however, the price has still remained above its 50-day moving average. As long as this situation persists, it is still possible to view gold's price action as a consolidation following the fierce rally seen in August.

The price development of the other precious metal, silver, looks quite similar. We do not see any actual upward momentum, but as long as the price stays above its 50-day moving average, it is possible to maintain the interpretation of a consolidation within an ongoing uptrend.

Crypto market turning into a correction?

In the crypto markets, we have received indications over the past few days of the potential start of a correction.

In recent weeks, we established the $76,000 mark as a significant watershed for Bitcoin's price. We had dismissed downward moves occurring above it as mere consolidation after a fierce rally.

In the past few days, however, we have begun to see this milestone breached. This could suggest that perhaps a more significant correction could be starting.

If Bitcoin's price turns into a downtrend next, it will inevitably force us to examine the interpretation that August's strong price surge only printed a new "lower high" within an ongoing downtrend. According to this interpretation, cryptocurrencies would not appear to have entered an actual bull market yet.

This is, of course, getting ahead of things. Another perfectly viable alternative is that Bitcoin's price stays above $60,000 and prints a new "higher low". This, in turn, would suggest that the downtrend has truly ended and would strengthen expectations of a transition into a bull market.

Right now, however, we are seeing some signs in the crypto markets that warrant caution. In addition to Bitcoin's price turning into a gentle downtrend, we have also seen altcoins begin to weaken slightly relative to Bitcoin. This would reinforce the interpretation that crypto investors are shifting to a more cautious stance. Together, these observations force us to remain quite cautious regarding the crypto market at this time.

We are living in an interesting moment in the financial markets. There are plenty of dark clouds visible over the stock market, and the overall look of the crypto market also provides some reason for caution. Yet, we have not seen these warning signs materialize into more significant corrections. Are the warning signals we are seeing just a false alarm, or perhaps the calm before the storm? Wherever the market goes, we will continue to monitor the situation and keep you up to date, so stay tuned!