Inside Markets — Cyclical Recovery

The RTY faded late in yesterday’s session to close just below the cycle high of 2264. The index is making another attempt this morning driven in part by an encouraging macro message from cyclically exposed earnings reports/calls from MS, JBHT, SYF, UAL and USB. The message from bank earnings has been consistently positive since the Q3 season kicked off last Friday. A sustained (several days) RTY close above 2264 and corresponding strength in copper would signal a cyclical recovery in our view. The combination would also encourage us to add more cyclical, small and mid-cap exposure. As mentioned yesterday, we’d prefer adding mid-cap vs. small cap exposure with the S&P Midcap 400 index trading at ~14.5x forward estimates, while the RTY trades at ~20.9x. Copper is ticking higher this morning but has spent the last 2.5 months in consolidation mode. A reacceleration in the on-the-run copper futures contract above $460 (December now $437) would be our cross-market confirmation of a breakout in the RTY.

Cyclical leadership would likely encourage more ‘concentration rotation’ out of crowded mega-cap stocks, which would lead to relative underperformance in the SPX. Consequential equity rotations always start quietly and only become mainstream when it’s too late (‘boiling frog’), so it’s best to closely follow the relative performance at the index, sector and factor level.