Inside Markets — SPX Levels

Yesterday’s pullback in the SPX triggered a number of questions about whether this is the end of the rally.  The decline was the largest of the calendar year, but it’s important to recognize that the SPX closed yesterday within 1% of its all time high that was set last week.  The term ‘pullback’ usually implies something like 2-3% and getting there likely requires a downbeat start to CQ1 earnings season (next Thursday) or higher bond yields.  In ten-year yield terms, the trigger for a more significant pullback looks like something north of 4.40%.  Equities are more sensitive to increased bond volatility than yield levels but 4.40% is significant because the November break below that level marked a change in trend.  The near-term bullish trend in the SPX stays intact above support at 5160 with a 2-3% pullback testing that level.  But a break below 5160 doesn’t signal an end to the rally.  In our opinion, that occurs on a break below 4980 where we’d expect to see increased selling momentum.

Next Wednesday’s CPI print is the most significant near-term catalyst for markets.  Monday’s improved ISM manufacturing report with a higher prices paid component followed a similar message in flash PMI data.  The survey provider of PMI (S&P Global) included the following commentary in the 3/21 report: ‘costs have increased on the back of further wage growth and rising fuel prices, pushing overall selling price inflation for goods and services up to its highest for nearly a year. The steep jump in prices from the recent low seen in January hints at unwelcome upward pressure on consumer prices in the coming months.’

The recent backup in bond yields and commentary like the above have markets somewhat prepared for a hot March CPI print. We also note that quarter-end rebalancing from last week may have played a part in this week’s yield backup.  Quarter-end rebalancing after significant (10%+) equity outperformance temporarily compresses bond yields and the ensuing backup in yields at the start of the new quarter tends to overcompensate – especially when liquidity is low.