Weekly Momentum Update Video (2:36)

Weekly Size and Style Update Video (5:01)

This past week’s rally in small caps is nothing short of remarkable. The Russell 2000 Index (RUT) has gained 11.52% in a week compared to just 1.62% for the S&P 500 Index (SPX). This has led the All US Small Cap group on the Asset Class Group Scores page to a weekly overbought/oversold reading of 139%, on July 10th the weekly OBOS reading was -4.57%. The table below lists dates when the weekly OBOS reading increased by 100% or more in a week which has only happened nine times, excluding clusters within a month. On average, the prior 10-week performance, the lookback period for the weekly OBOS calculation, RUT was down 3.71% with a median loss of 5.24%. However, in the most recent occurrence, RUT gained 5.67% over the prior ten weeks. The only other times RUT gained more than 5% leading up to such a large increase in weekly OBOS were July 2009 and November 2020 which led to strong returns over the next ten weeks. The only other time the All US Small Cap group had this high of an OBOS reading after such an increase was in November 2020. Many may remember this is when the vaccine announcement sent small caps into a frenzy. Given the rapid rise, current OBOS position, and lack of a market anomaly like 2020, investors should be skeptical of the recent move in small caps, especially for those looking to buy.

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Weekly Crypto Update (2:27)

The crypto space moved largely higher over the last seven days as the odds for a Trump presidency surged higher following last weekend's events. While many constituents of the Nasdaq Crypto Index (.NCI) put in place double-digit positive returns, the upside action was somewhat limited from a purely technical perspective. In most cases, action saw coins reverse back up to the middle of their respective trading band, a net positive but not quite enough to change the overall fragility of the crypto industry's recent action. Bitcoin surged back up above $60,000, a point bulls will watch closely in the near term to see if buyers entrench themselves around that level once again. Much like action on the domestic equity front, upside participation was broad enough (smaller coins joining in) to see .NCI move higher on its default chart. The index posted its first buy signal since late June, challenging its negative trend line above. This echoes similar themes as mentioned before- positive… but there is still work to be done before one could safely say crypto’s rally is back on.

With Bitcoin moving back up above $60,000, it brings the crypto king just outside of 10% off its all-time highs back from March of this year. While it certainly feels like things have stagnated around this mark for quite a while now, historically Bitcoin has shown several instances of prolonged action (defined below as 30 days) around all-time highs. Its most recent streak ended in mid-June at 32 days. Since 2015, there have been six other instances of extended action around those all-time highs, the longest coming in 2016 at a total of 80 days. While this study is admittedly simple, performance metrics following these streaks reveal quite a compelling story. Near-term returns following the end of such a streak are significantly worse than the “average” for those time frames, while more intermediate to longer-term timeframes boast excess returns over “normal” circumstances. Said otherwise, near-term results are typically rocky (like we saw most recently in June) while longer-term results have perked up quite nicely. Each instance comes with its own unique set of circumstances, and previous reports have already touched on the rocky technical picture emerging within the crypto space this time around. Keep this idea in mind as Bitcoin continues to bang up around respective all-time highs… it can often last longer than you may expect. 

Each week the analysts at NDW review and comment on all major asset classes in the global markets. Shown below is the summary or snapshot of the primary technical indicators we follow for multiple areas. Should there be changes mid-week we will certainly bring these to your attention via the report.

Check out this week's Major Index and DALI Overview (3:33).

Small caps have taken the limelight over the past week or more as the Russell 2000 RUT and other small cap-related indices rallied to 52-week or multi-year highs. Last week’s action wrapped up with small caps like the iShares Russell 2000 ETF IWM up over 6% as it outperformed the SPDR S&P 500 Trust SPY by over 5%. This marks the largest weekly spread between IWM and SPY in eight years and comes in as the seventh-largest weekly spread between the two ETFs since the beginning of 1994.

Small caps’ hot streak has continued through the start of this week. As of 7/16, the IWM has gained over 11% in the last five trading days, which is extremely rare. A 10% gain within 5 trading days occurs once every 350 trading days on average, with instances above the current +11% level happening almost twice as infrequently as that.

Though there hasn’t been a major impact on the underlying domestic equity size and style rankings in DALI, the rally within small caps has seen some impact on the broader asset class rankings. With commodities and international equities jockeying for the second position currently, a continued rally by small caps could ultimately tip the relative scales as it may allow domestic equities to take tally signals from these asset classes. Below, we’ll take a look at a few relationships worth monitoring.

The first relative strength (RS) chart below compares the iShares Russell 2000 ETF IWM against the NDW Proprietary DALI Commodity Index on a 3.25% scale. Following this Tuesday’s action, the RS chart reversed back into Xs after having been in Os since April. With the reversal in Xs, IWM is now favored in the near term over the broader commodity index, and since the chart has maintained an RS buy signal since December last year, IWM is favored in the long term as well. Note though, that the RS chart has moved to favor IWM at various points since 2022, but since August of that year, there has been a level of relative resistance in which small caps have been unable to continue its improvement. A move above this level of the RS chart would finally confirm that small caps can potentially sustain outperformance over commodities.

Beyond gaining ground on commodities, IWM has also been encroaching on the international equity space. Following further gains this week, IWM returned to a buy signal against the Vanguard Developed Asia-Pacific ETF (VPL), highlighting the potential for small-caps to take additional relative strength over international equities. 

The final RS chart compares IWM against the Invesco QQQ Trust QQQ on a 3.25% scale. Tuesday’s action also brought this RS chart back into Xs to favor IWM in the near term over the Qs, but as mentioned above a +10% in a given period is likely to cause a potential RS chart reversal (or change) on this scale (i.e. a 3 box reversal would consist of 9.75% in relative outperformance). Bear in mind though, that the RS chart still maintains an RS sell signal, which has been in place since April 2022. Looking back further at the RS chart’s history the Qs have generally been favored since February of 2009. There have been near-term periods of outperformance by small caps – and even a couple of RS buy signals – but eventually, the Qs were able to pick back up and return to their relative outperformance over small caps.

While there is still a bit of an uphill climb for small caps relative to large caps, especially the Qs, this recent push by small caps may be the spark needed for small caps to at least join the game, rather than just sit on the sidelines. As also shown, be sure the monitor potential fluctuations in the tally signal count of commodities and international, as continued strength by small caps could impact the asset class rankings within DALI.

U.S. Sector Updates

The past week saw no significant technical developments in the Communications Services, Consumer Staples, or Health Care Sectors. Those that saw noteworthy movement are included below, in order of their relative strength ranking in the DALI domestic equity sector rankings. Sector designations are based on DALI sector rankings and are as follows: 1 - 3 overweight, 4 - 7 equal weight, and 8 - 11 underweight.

Asian equities have seen the most improvement across most of our relative comparisons over the past month. This is clear on our Asset Class Group Scores (ACGS) page, which can be filtered for non-US groups. Doing so trims the list of classification into only those fund groupings that include international-focused representatives, alongside some baseline benchmark groups. India has sat at the top of that list for some time, followed by Japan. However, resorting the list by score direction shows a slightly different story. Here, we can see that the non-US group with the top score direction, or near-term momentum indication, is Pacific Basin X Japan, along with Asia, then India. Super Pacific, Pacific Basin, and China all show higher score directions than the S&P 500 Index Funds group.

Even though China has technically shown more near-term momentum, it is the only international group with a sub-2.00 “red” coloring that still has a positive score direction. China has been near the bottom of most relative comparisons for a while now. Even after showing significant improvement from February through May, the last six weeks of movement have not done much to alleviate investors’ concerns about the country. The question remains, when will China fully bounce back?

Unfortunately, we won’t have a direct answer to that question until the price movement occurs. Our analysis is trend following by nature. We are not looking to predict when a change in trend will take place, but rather highlight the change when it happens and take advantage of the momentum moving forward. While China is not as bad as it was, that is not a reason to jump at adding exposure, at least not yet.

Those looking to time a trade around China should consider monitoring our participation indicators that monitor Chinese equities. Specifically, the 40 Week Indicator for Shanghai (^40SH-SH) can be used for long-term participation, and the 10 Week Indicator for Shanghai (^TWSH-SH) can be used for short-term participation. Each of these indicators measure the percentage of stocks we track from the Shanghai stock exchange (roughly 965 members) that are trading above their 40 week (200-day) or 10 week (50-day) moving averages, respectively. They are most helpful at extremes and can be useful when comparing current movement to what we have seen historically.

Taking the 40 Week chart first, we saw this indicator drop down to 12% in February, its lowest level since 2019. It then reversed sharply higher and climbed to 42% by May. It has since fallen to 22% but is still in a more favorable position than we saw a few months ago. It is normal to see these indicators exhale after rapid growth. The important thing to monitor here would be making sure we do not continue to see declining long-term participation. On the other hand, a reversal back up into a column of Xs would constitute a higher low, adding to the positive weight of the evidence moving forward.

The other indicator to monitor is the 10 Week chart, which is much more near-term focused. This leads it to move quicker than its 40 week counterpart, making it more important to monitor around extreme levels. We are sitting at an extreme currently, as the chart moved down to 12% for the second time in the past month. When we see this chart move below 20%, reversals higher have often been a strong near-term buying opportunity. The near-term nature of this chart makes it more conducive to traders, but it can be helpful to keep an eye on for potential shifts in investor sentiment in China.

Weekly Fixed Income Update Video (2:50)

US Treasury yields were down over the last week. The US Treasury 10-year Yield Index (TNX) is now testing support and its bullish support line at 4.2%. Further in on the yield curve, the US Treasury Five-Year Yield Index (FVX) gave a third consecutive sell signal when it broke a spread triple bottom at $41.50 last week, putting it in a negative trend for the first time since April.

Declining yields have boosted bonds and the iShares US Core Bond ETF (AGG) returned to a buy signal last week when it broke a spread triple top at $98.25, taking out resistance that had been in place since March. Despite the recent improvement, AGG still has a weak 1.50 fund score.

Fed futures are now pricing in a better than 95% chance of a rate cut at the Fed’s September meeting and a better than 50% chance of at least 75 bps of cuts by the end of the year.

Core groups have continued to show modest improvement recently. The US Fixed Income Long Duration group has crossed above the 2.5 threshold and the US Government-Agency group has reached the 3.0 score threshold for the first time since February.

Remember, these are technical comments only. Just as you must be aware of fundamental data for the stocks we recommend based on technical criteria in the report, so too must you be aware of important data regarding delivery, market moving government releases, and other factors that may influence commodity pricing. We try to limit our technical comments to the most actively traded contracts in advance of delivery, but some contracts trade actively right up to delivery while others taper off well in advance. Be sure you check your dates before trading these contracts. For questions regarding this section or additional coverage of commodities email will.gibson@nasdaq.com.

Data represented in the table below is through 7/16/2024:

Broad Market Commodities Report

Portfolio View - Commodity Indices

Last week we talked about gold’s (GC/) consolidation pattern and seasonal tendency to underperform in the back half of an election year. However, in the past seven days gold rallied over 4% and reached all-time highs. What happened?

In short, June CPI data came in softer than expected, and consequently investors accelerated their rate cut expectations. Odds of a September rate cut are currently just below 100%.

Recall that gold typically performs well when real yields are falling. So, if inflation is moderating and interest rates are declining just as fast (or faster), zero yielding gold looks more attractive. Also, remember that gold is viewed as a safe haven asset and rate cuts are economically stimulative actions. By that definition, falling real yields and investor concern are arguable mutually inclusive – which should pose some healthy concerns about the current environment.

Another notable development related to gold last week – GLD reversed up against CPER on a 3.25% relative strength chart. Said differently, we have seen gold outperform copper by about 10%.

CPER still maintains a relative strength buy signal against GLD, which is historically a good sign for equities as further explained here, but the latest reversal poses a threat. Technically it is fine to see gold appreciate, but ideally not more than copper.

Daily Option Ideas for July 17, 2024