Morning Notes — Bond Yields, Dispersion and Resistance Levels

Bond yields: The steeper yields curve today seems tied to increased expectations for bond supply to outpace QE. Today, a second sell-side firm estimated that increased QE activity will be required to keep bond yields in check. That shouldn’t be a problem for the Fed and we expected (wrote about it extensively in April) timing mismatches between bond issuance and Fed purchase activity could produce temporary yield ‘back-ups.’ But still something to watch as the steeper curve may also reflect market expectations for increased future inflation/growth.

Dispersion: Curve steepening is helping cyclical and ‘value’ sectors outperform for a third straight session. Rally attempts based on cyclical sector leadership are considered more sustainable that those based on defensive sector leadership.

SPX: The dispersion is encouraging, especially as the S&P 500 makes yet another attempt to push through technical resistance at ~2950 and levels consistent with past CTA inflow triggers. As discussed yesterday, those trigger levels generally line up (in a narrow band) with the 12-moving moving Volume Weighted Average Price on the SPY, which is currently ~$298 or ~2980 in the SPX. If the SPX can get through that level, we mark upside to ~3100 at which point, the z-score on momentum signals would probably be closed to 1.5σ…a level generally considered ‘overbought’ and a good place to start looking for consolidation. And failure to break though the current level would probably lead to a more immediate period of consolidation