S&P 500: Navigating a Pullback
Is the melt-up already at risk?
The S&P 500 closed the week down nearly 2%, and the Nasdaq fell 4%, marking the worst week for both since April. Interestingly, small-cap risk-on barometers showed mixed results: the Russell 2000 closed up 1.7%, while Cathie Wood’s ARKK dipped only slightly at -0.34%. Interesting.
This week brings a lack of clarity to the analysis, with scenarios positioned for potential change. Last week's discussion focused on the potential for a melt-up scenario, contingent on inactive risk-off criteria and small-cap participation, particularly monitoring key levels for the Russell 2000 and the ARK Innovation ETF.
This week's note is chart heavy and word light, providing a thorough review of the risk-off criteria and highlighting potential risks in development. Additionally, full chart updates are included for all three trade idea categories: US Small Caps (3), Outside US Equities (3), and The Gold Trade (1).
Risk Off Criteria
The combination of three indicators in my analysis determine if the market is in a risk-on or risk-off environment. When all three are active— the market is risk-off, and vice versa when they are inactive the market is operating with a risk-off backdrop.
The three criteria:
The Short Term Trend— price relative to the 20-day exponential moving average
Breadth— the number of stocks making new highs vs new lows across NYSE & Nasdaq markets
Momentum— measured using the Percentage Price Oscillator