S&P 500 reaching for its record

Quick recap: last week

Last week's Kvarn X Pulse newsletter was written in a fairly optimistic mood. The S&P 500 index had held at the level of its 50-day moving average, and conditions still appeared reasonably good for the uptrend to continue. We did, however, draw attention to the technology sector's relative weakness, and considered it likely that a continued uptrend would require the technology sector to start strengthening again soon.

S&P 500 seesawing

Over the past week, the overall picture in the equity market has remained largely unchanged.

The S&P 500 index dipped below its 50-day moving average on Friday, but has quickly climbed back to almost exactly the same level as a week ago.

A break below the 50-day moving average, even a brief one, is often a mild warning sign. The next key question, then, is whether the rally that began this week is enough to push the index above the record set in early October (around 7,850 points), or whether it will stall as a “lower high”, which often serves as a warning sign.

Unlike the S&P 500 index, the tech-heavy Nasdaq 100 index has not yet climbed clearly above its own 50-day moving average. As long as this remains the case, we still have to keep some reservations about whether the equity market is ready for more significant moves higher at the index level.

The small-cap Russell 2000 index has given the first signs of a possible recovery in recent days, rising above its 10-day moving average. It is, however, still below its 20-, 50- and 200-day moving averages, which cannot yet be considered an uptrending setup.

Last week, we drew attention to the significant weakening of the technology sector (XLK) against the rest of the S&P 500 (SPXT). The chart below shows how the technology sector clearly outperformed the rest of the S&P 500 in September and then weakened sharply in the first half of October.

The chart also shows that XLK/SPXT is still below its 50-day moving average. In our reading, this reflects investor caution and “risk-off” sentiment.

On the positive side, however, this ratio has not made any lower lows since last Friday. This gives cautious hope that the worst of the decline in the technology sector may already be behind us.

Some other ratios that give an indication of investors' risk appetite have also started to recover this week. The SPHB/SPLV ratio, which compares high-beta and low-volatility stocks, has been rising steadily this week.

On the other hand, the RPG/RPV ratio, which compares growth and value stocks, is not yet in as clear an uptrend.

Perhaps the most promising signal in the equity market relates to the improvement in market breadth. Already more than half of S&P 500 stocks are above their own 50-day moving average.

In the last few days, the breadth of the Nasdaq 100 index has also started to improve.

As long as this development continues, it is hard to be very pessimistic about the equity market's short-term outlook.

On the VIX and MOVE side, we are seeing somewhat mixed signals. The VIX index returned above its 200-day moving average on Thursday, which gives reason for caution.

The MOVE index, on the other hand, has turned lower in recent days.

The clearest warning sign appears to be the ratio of the VIX to the three-month VIX. This ratio is above all of its moving averages, suggesting that short-term volatility expectations are clearly elevated.

In summary, we would sum up our view of the S&P 500 as follows:

Investors still appear to be in a risk-off mood. The risk of corrections remains clearly elevated. Over the past week, however, the situation has developed in a slightly positive direction. If developments over the coming week continue in the same direction, the equity market could start to look outright promising.

Gold trending lower

The downtrend in precious metals that began in August appears to be continuing. On Thursday, the gold price appeared to be falling below $4,100, a level that has long served as support in previous weeks.

At the same time, the price of the other precious metal, silver, appears to be testing its July low at around $55.

The coming week will therefore be interesting in the precious metals market. The key question is whether gold's $4,100 and silver's $55 support levels will hold. If prices do not turn higher from these levels over the coming week, it would give reason to prepare for a possibly larger move lower.

Bitcoin holding steady

The price of the largest cryptocurrency, bitcoin, has remained fairly stable over the past week. The bitcoin price appeared to lose momentum during October and had fallen below its 10- and 20-day moving averages. However, the 50-day moving average appears to have provided support so far, and the prospects for the rally to continue still look quite good.

In the very short term, however, we note that during the night before Thursday, the bitcoin price was rejected around $85,000 and is currently below its 200-hour moving average.

As long as the price stays above $80,000, we see a fairly good chance of the rally continuing. Our primary expectation is that bitcoin's price action will continue to track tech stocks in the coming weeks. For this reason, our stance on it is similar, i.e. guarded but cautiously hopeful.

In the altcoin market, we have seen slight strengthening against bitcoin in recent days.

We note, however, that the ratio of total altcoin market cap to bitcoin's market cap still appears to be in a clear downtrend. The coming week should tell us whether the altcoin market's next leg higher is really starting.

Theme idea: healthcare

This week, we are highlighting healthcare as our theme idea.

A week ago, we highlighted healthcare as part of our defensive stocks theme idea. The past week has strengthened this view even further.

Healthcare has been one of the strongest investment themes in recent months.

Healthcare ETFs turned higher again during October, and over the past week many of them have risen to new record highs.

In the tech-driven bull market of recent years, healthcare has lagged well behind the S&P 500. In recent months, however, we have seen the healthcare sector strengthen clearly, and it will be interesting to see how long this trend lasts.

The healthcare sector is made up of a wide variety of companies, from small biotech firms to large pharmaceutical giants, which means that different healthcare segments may have the potential to perform well in very different market environments.

In summary, the overall picture in the investment markets has become a few shades brighter over the past week. Clear question marks remain, and the market cannot yet be described as particularly risk-on. Right now, however, the direction of travel is positive.

The key questions for the coming week are whether we will see the S&P 500 index rise to record highs and/or the bitcoin price break above the $87,000 level. Either of these happening would be a very promising sign, while failure would once again tilt our reading in a somewhat more cautious direction.

Wherever the market goes, we will keep following the situation and keep you up to date, so stay tuned!