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Midweek Market Trend

Trade-war-induced volatility has been the theme over the last week, and the market has suffered some technical damage. For example, the Nasdaq Composite (COMPX) lost its 50-day moving average for the first time since January. Traders will be watching that level to see if it acts as resistance in any rally attempt. If it does, the tech heavy index could test the 200-day moving average, which acted as resistance last November (Figure 1).

line graph illustrates Nasdaq Composite (COMPX) at an open of 7689.66, a high at 7775.71, low at 7665.30, and close at 7772.91 on May 14, 2019.

Figure 1

Source: StreetSmart Edge®

The situation is similar for the S&P 500 (Figure 2).

line graph illustrates S&P 500 (SPX) at an open of 2820.12, a high at 2851.94, low at 2820.12, and close at 2850.31 on May 14, 2019

Figure 2

Source: StreetSmart Edge®

The action of the Russell 2000 (RUT) has been a bit puzzling. The RUT is comprised of smaller capitalization companies, which tend to have a larger portion of their revenue from domestic sources, so at first blush you would think they would be outperforming the more internationally focused SPX. But over the last week they have actually been underperforming, as shown by the downward sloping relative strength line (Figure 3) (A). Perhaps one reason is that the second largest weighting in the RUT is the financial sector, where yields have trended down (Figure 4), and the 3 month-10 year yield curve has flattened (Figure 5). Whatever the reason for the underperformance, the overall market tends to do better when the small caps are leaders and not laggards.

line graph illustrates Russell 2000 (RUT) at an open of 1526.02, a high at 1546.09, low at 15216.02, and close at 1545.94 on May 14, 2019. Figure 3A: line graph illustrates downward sloping relative strength line, which indicates the RUT has been underperforming the SPX.>

Figure 3

Source: StreetSmart Edge®

line graph illustrates treasury yield (TNX) at an open of 24.14, a high at 24.28, low at 24.02, and close at 24.21 on May 14, 2019.>

Figure 4

Source: StreetSmart Edge®

line graph illustrates U.S. Treasury 3 month-10 year yield curve has flattened.

Figure 5


Turing to sector action, it is instructive to look at the relative performance over the last week to gauge how sensitive each sector is to trade jitters (Figure 6). Real estate and utilities are actually up over the last week, which makes sense since they are certainly domestically focused. On the other hand, technology companies, especially the semiconductors, have more of their revenue exposed to China. And since consumer discretionary companies have manufacturing exposure in China, higher manufacturing costs could compress margins even if the majority of their goods are sold domestically.

Figure 6: stock ticker table shows that real estate is up +1.27 and utilities are up +0.07, and information technology is down at -2.12.>

Figure 6

Source: StreetSmart Edge®



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