Inside Markets — Uncertainty Discount

Last week, the SPX rebounded from the 5500-5560 support layer that contains the 52-week Volume-Weighted Average Price (VWAP) for the S&P 500 ETF (SPY).  The 52-day SPY VWAP with a 2% band (1% on either side) has served as a technical demarcation zone for the index over the past 25 years.  As we noted earlier last week, most relief rallies are tested with a capitulation-based intraday low (below 5500) often being the best opportunities to add exposure.  If the relief rally extends, it will face technical resistance at the 5765-5910 breakdown level from March 4.   The bullish reversal in the Philadelphia Semiconductor Index (SOX) from last Tuesday (we discussed last Wednesday) from the top-end of the 4200-4300 support range (former lows and 38.2% retracement from 2020 low) will face overhead breakdown resistance at ~4750, which is ~2.7% above current levels.

The upside tail risk for US equities should remain constrained into likely tariff announcements on/after April 2. An uncertainty discount has been applied to US equities, and it will remain there until there’s more policy clarity.  The upside case is also constrained as capital continues to gradually flow to German/Eurozone equities (Germany’s ~$1T fiscal plan) as investors have been underweight Europe following a decade of near-zero earnings growth.  At the same time, the US economy seems to be losing momentum partially due to plans to spend ~$1T less over time. The days of capital exclusively flowing to the US are over for the time being, but this dynamic is unlikely to have a huge impact absent a US recession.