Wall Street

US Equities & Indices Market Update

After the sell-off that initially took the index down to the 100-day moving average in September, and then below it in early October, dip-buyers returned to help hold the line at 4,310. On Thursday, October 14, we saw the S&P 500 breaking its downtrend to set a higher high at 4,438. Since then, we’ve had five consecutive green days, taking it to new record highs of 4,549 on October 21.

Leaders and Laggards

Of the 4 major indices, only the S&P 500 and Dow Jones Industrial Average have currently booked new highs. The Dow Jones actually led the market, setting an intraday all-time high of 35,674 on October 20 but then closed the day just lower than its former record high at 35,610.

The S&P’s move into blue skies was the more convincing of the two, but it is still only trading around a quarter of a percent higher than its previous record close. The Nasdaq 100 has also been aggressively bought; however, it still has some ground left to cover. Currently trading at 15,489, it is around 1.3% from its previous record high at 15,700.

Meanwhile, the Russell 2000 still finds itself in the same trading range it has been in since the beginning of the year. The low was set back in January at 2073, the high was set in March at 2,359, and it has been trading between these two levels for the entirety of 2021.

Percentage Moves from the Bottom

Taking into account the gains each index has made from the recent bottom, we get an entirely different picture of which is leading and which is lagging. At the time of writing, the Dow Jones has rallied 5.2% from the bottom, the S&P 500 has gained 5.7%, the Nasdaq gained 7%, and the Russell, an impressive 7.7%.

Of the four, the Russell’s chart is the most interesting from a technical standpoint. It has spent the whole of 2021 consolidating after massively outperforming the rest of the market between October 2020 and March 2021. This is evident in how tight its various daily moving averages are becoming. The index’s 20-, 50-, 100-, and 200-day moving averages are all currently sitting within 1% of each other and the recent bout of bullish activity has caused it to break above all four in one move.

Sector Breakdown

Slicing US equities a different way, we can see which sectors have been outperforming on this most recent move. Financials, energy stocks and consumer discretionary have all recently made new highs, with technology trading just below its recent high and industrials a little further behind in fifth place.

The narratives represented in this combination of sectors that are testing former highs or have already broken higher include the inflation trade, with energy as the current benefactor of this activity from the commodity complex, and consumer discretionary, which relates to non-essential luxury goods that are experiencing drastic price increases.

This is one of the unavoidable consequences of the monetary and fiscal largesse we’ve collectively embarked upon since the pandemic. Namely, more cash vying for scarce desirable goods, which are becoming ever scarcer thanks to supply chain disruptions and increasing energy costs.

We can see this in the percentage gains these sectors have made since breaking to new highs. Consumer discretionary currently leads, having exceeded previous highs by 3.7%. Energy stocks come in second, having beaten former highs by 3%, and financials by 2.7%. The performance of financials could have something to do with a growing expectation of two rate hikes in the coming year as a result of inflationary pressures.

Food for Thought

The Nasdaq and the Russell have locked horns since the market bottom of March 2020 and then into the rotation we’ve seen, initially from reopening to lockdown, and more recently from reflation to inflation. Of the indices discussed above, the Russell has experienced the largest move from the early October bottom, and the Nasdaq has undergone the second-largest move. Of the sectors, technology is also the one closest to breaking to new highs.

Perhaps this is a reflection of how disjointed markets have become since Covid-19, or perhaps it is simply part of a “new normal.” In this new normal, the 60/40 portfolio (60% stocks, 40% bonds) generally hasn’t served investors who have been in the strange position of buying bonds for the capital appreciation and tech stocks for the yield. With bond markets not offering worthwhile yields, tech stocks are increasingly filling this need, despite already being so overpriced.

What seems to be currently playing out across US markets is a tug of war between inflation, reflation, the possibility of rate hikes, and a general uncertainty as to how it all comes together. All this, against a backdrop of prices rising into year-end, which tends to see the highest demand in both energy and consumer goods. Could this be the beginning of a year-end melt-up?

HYCM is an established and multi-regulated global broker providing a first-class trading experience in Europe, UK, Asia and the Middle East. Among the wide range of 300+ instruments HYCM offers for trading are the aforementioned major indices, the S&P 500, the Dow Jones Industrial Average, the Russel 2000, and Nasdaq, as well as stocks in customer discretionary, energy and big tech.

by Giles Coghlan, Chief Currency Analyst, HYCM

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