GLOBAL STOCKS TRADE LOWER ON HEIGHTENED TENSIONS -- MACD LINES FOR S&P 500 TURN NEGATIVE -- SMALL AND MIDSIZE STOCKS ARE DAY'S BIGGEST LOSERS -- VIX INDEX GAINS 8% -- RECENT GAINS IN THE NASDAQ 100 VOLATILITY INDEX ARE OF MORE CONCERN
S&P 500 PULLS BACK ... Global stocks are in the red today, which continues the profit-taking that started yesterday afternoon. Yesterday's downside reversal day in U.S. stock indexes on rising volume signaled the likelihood of more profit-taking. Foreign stocks in Europe and Asia are falling more than the U.S. Part of that may be due to the fact that they were closed when U.S. stocks sold off later in the day yesterday. Bigger losses in Asia (and especially in South Korea) are most likely tied to their closer proximity to rising tensions on North Korea. While stocks are weakening, money is flowing into safe havens like gold and Treasury bonds. Given the overbought nature of U.S. stock indexes, quiet trading conditions, and unusually low volatility, it doesn't take much to move the market. The main catalyst for this selloff has been more hawkish talk on North Korea. Chart 1 shows the S&P 500 trading lower today with relatively mild losses. The SPX remains above initial chart support at 2460, and well above its 50-day moving average and a rising trendline drawn under its May-July lows. Very little damage has been done to the benchmark's uptrend. Of more concern is the negative turn in daily MACD lines (top of chart). The last three times the two MACD lines turned negative the market trend weakened (red arrows). Smaller stocks aren't doing as well.
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Chart 1
SMALL AND MIDCAP STOCKS WEAKEN ... The day's biggest losses are being seen in small and midcap stocks. Chart 2 shows the S&P 600 Small Cap Index falling to the lowest level in a month and is back below its 50-day average. It's nearing a test of potential chart support at its early July low (flat line). Chart 3 shows the S&P 400 Mid Cap Index in a similar situation. Relative weakness in smaller stocks is usually a warning sign for the rest of the market. So we'll be keeping a close eye on those two stock indexes for any signs of more serious weakness.
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Chart 2
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Chart 3
NASDAQ 100 VOLATILITY INDEX HAS BEEN CLIMBING SINCE MARCH... Not surprisingly, measures of market volatility are bouncing. Not enough to signal any trend reversals, but enough to keep an eye on. Chart 4 shows the CBOE Volatility (VIX) index climbing 8% today to the highest level in a month. It would need to clear its early July peak at 12.54, however, to send a more negative warning. A little more concerning is the recent rise in the CBOE Nasdaq 100 Volatility Index ($VXN). [While the VIX is tied to the S&P 500, the VXN is tied to the 100 largest stocks in the technology-dominated Nasdaq market]. Chart 5 shows the VXN forming a pattern of rising peaks and troughs since March. That divergence between the two measures of volatility is unusual since they usually trend in the same direction. The divergence is also quite large. Chart 6 shows the "spread" between the VXN and the VIX reaching the highest level since 2006 at the end of May (see circles). It's pulled back over the last two months, but remains elevated. It's hard to tell if that wider spread between the two is sending a warning. But it's the kind of unusual behavior that suggests that market risk might be more elevated than the lower VIX reading would imply.
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Chart 4
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Chart 5
