S&P 500 at a watershed

Quick recap: Previous week

Last week, the Kvarn Pulse newsletter was written in a rather cautious mood. The S&P 500 index had dropped below its 10-day and 20-day moving averages, which forced us to prepare for the possibility that a period of at least momentary weakness might be beginning, if not a larger downward correction.

S&P 500 at a watershed

Over the past week, the overall outlook for the stock market has remained relatively unchanged. Late last week, the S&P 500 index briefly rose above its moving averages, momentarily raising hopes that the warning signs we observed might turn out to be a "false alarm."

This week, however, the S&P 500 index has turned back downward. The index is currently below both its 10-day and 20-day moving averages again. Furthermore, the 10-day moving average has crossed below the 20-day average, and both of these moving averages are trending downward. The trend of the S&P 500 index is therefore increasingly beginning to look bearish.

Right now, the index is sitting just barely above the 7,600 point mark, which we have established as a key dividing line. This round number appears to be a fairly significant milestone. It acted as the upper boundary of the previous May–July trading range, and it has served as the lower boundary of the August–September range. The 50-day moving average is also hovering right at that level.

The distance to this watershed is now only about half a percent. What happens around the 7,600 point area may play a highly significant role in assessing the stock market's outlook for the coming weeks. A break below this level would force us to prepare for a potentially more substantial correction. On the other hand, a reversal upwards from these levels could offer a very attractive buying opportunity with a clear invalidation point.

Looking beyond the S&P 500 index, we are seeing somewhat interestingly contradictory signals in the stock market. The ratio between the Nasdaq 100 and S&P 500 indices (QQQ/SPY), which often provides an indication of market risk appetite, has turned into a clear uptrend over the past week and is now above both its 10-day and 20-day moving averages.

Similarly, the SPHB/SPLV ratio, which speaks to the strength of high-beta stocks against low-volatility ones, has turned upward over the past week. This ratio is already above all its key moving averages, and its 10-day average is just about to cross above the 20-day average.

These are not quite the typical hallmarks of a stock market preparing for a correction.

Elsewhere, however, we are seeing signs that point specifically to an elevated risk of a correction.

Market breadth has seemingly collapsed over the past few weeks. Currently, only 42 percent of the stocks in the S&P 500 index are trading above their 50-day moving average.

The proportion of stocks above their 200-day moving average has also taken a sharp turn downward.

The VIX index is also beginning to flash early warning signs. The absolute readings of the VIX remain relatively low, but it has climbed above its 200-hour moving average. Historically, this has not been a particularly good sign for the short-term outlook of the S&P 500 index.

On the bond market side, we can see that the MOVE index has likewise climbed above its own 200-hour moving average. This, too, has not typically been a favorable environment for stock market performance.

We are therefore currently seeing multiple signs that point to an elevated risk of a correction. Going forward, our attention will focus on the aforementioned 7,600 point level. If this level is breached, the trajectory of the S&P 500 index would begin to look unequivocally bearish.

Gold price consolidates, silver strengthens

The price of gold has spent recent weeks in consolidation following a strong upward move. Right now, the price is below its 10-day, 20-day, and 200-day moving averages. The 10-day moving average has crossed below the 20-day average, and the 20-day moving average has just turned downward.

At the moment, the price of gold lacks upward momentum. However, it is still clearly above its upward-sloping 50-day moving average, so we will not yet declare the gold rally completely broken.

Over the past week, we have observed with interest the relative strength of the other precious metal, silver. The ratio between the prices of silver and gold has turned into a clear uptrend and climbed above its 10-day, 20-day, and 50-day moving averages.

As long as silver continues to strengthen relative to gold, it is difficult for us to turn our expectations for precious metals very pessimistic. Right now, we do not see an active upward move in the price of gold, but our primary expectation for it remains positive.

Bitcoin hovering around $80,000

In August and September, the price of Bitcoin has served up exceptional price action on two separate occasions. In early August, we witnessed a price surge that was exceptionally strong even by Bitcoin's standards, pushing the daily RSI indicator to readings near 90.

Since then, Bitcoin's price action has been exceptionally stagnant for nearly three weeks. The price has remained tightly anchored around the $80,000 mark, moving away from it only slightly and for brief periods.

Regarding Bitcoin's price, we are still waiting for either a break above the $83,000 level or, alternatively, a drop below the $76,000 level to form stronger interpretations. Movements happening between these bounds appear to us primarily as noise, and we are maintaining a wait-and-see approach for now.

Within the crypto market, we have observed an interesting phenomenon in the clear strengthening of altcoins. The ratio of the total market capitalization of altcoins to Bitcoin's market capitalization has climbed above all its key moving averages over the past week.

As long as we see this state of affairs continue, it is difficult for us to turn very pessimistic about the crypto market.

In summary, we are currently seeing an interesting and uniform phenomenon across equities, precious metals, and cryptocurrencies alike. The core instruments of each asset class (S&P 500, gold, Bitcoin) are showing a lack of upward momentum, which lowers expectations for the asset class as a whole. At the same time, however, we are seeing the higher-beta instruments of each asset class (technology stocks, silver, altcoins) outperforming the core instrument.

This is a rather interesting and somewhat atypical phenomenon, and right now we are seeing it repeated across three different asset classes simultaneously. Our expectation, however, is that such discrepancies will not last long, and these conflicting signals will soon straighten out into a more consistent combination. The burning question for the coming week is: which signal will prove to be more durable?

Thematic ideas: Industrial metals

For this week's thematic idea, we are highlighting industrial metals. While precious metals prices have been moving sideways without upward momentum, the price of copper, for example, has remained in a strong uptrend.

The price of aluminum has also turned upward.

If an investor does not want to seek exposure to different metals individually, the easiest solution may be to use an ETC product that invests in the entire commodity group. An example of this is the WisdomTree Industrial Metals ETC (AIGI), whose price has turned back into a clear uptrend over the past week.

We are currently living through a particularly interesting moment in the financial markets. As we noted above, interestingly contradictory signals are currently being seen across multiple asset classes. The markets have been relatively stagnant across the board. Such temporary states of equilibrium often precede larger moves, and it will be fascinating to watch in which direction these moves occur within each asset class. Wherever the market goes, we will continue to monitor the situation and keep you up to date, so stay tuned!