Author: jsc

Yesterday’s afternoon fade in the S&P 500 (SPX) looked like CTA selling and it’s important to see if the SPX can hold early gains without incremental drivers to shift the narrative.  

The most likely scenario from here still looks like a resumption in the cyclical recovery based on an end to the pandemic.

Bond yields will drive the near-term narrative as the 10-year approaches its 2020 high of 1.877%. We keep a Q1 target of ~1.90%, but see the 10-year tracking toward ~2.20% in the near-term, with the potential to extend toward the cycle high near ~2.50% sometime

This Friday kicks off CQ4 earnings season with a handful of large US banks reporting pre-open. Our preference to own regional banks over the last ~9 months was based on their ability to deliver loan growth despite difficult demand conditions.

Yesterday’s reversal and today’s follow through in Tech has been chalked up to deeply oversold conditions, but conditions were not/are not deeply oversold.

Growth sectors underperformed value sectors by 585bps last week as bond yields rose and the curve steepened.  

Wednesday’s release of Fed minutes is still the main driver of recently higher nominal/real yields and value sector (Financials/Energy/Materials) outperformance.

Ten year yields are currently trading at 1.72% with mild resistance in the 1.90%-1.94% range, but the real number is ~2.20% with the potential for ~2.50% over the next quarter or so.

Valuation is a dull instrument for timing the entry and exit of investments.  Valuation requires a catalyst to make it matter. In this case, the market is pricing in the end of the pandemic.

Over the past ~2 weeks, markets have been sending a signal that Omicron is the beginning of the end of Covid.