Inside Markets — SPX Resistance

Technical resistance for the SPX is the range-measured objective of 5099.  We see that level holding at least until 10-year yields confirm a peak by closing below ~4.19%.  Relatively benign macro conditions including declining rates of inflation, resilient growth and promises of policy easing have compressed realized equity volatility.  Periods of low equity volatility always result in multiple expansion as long as they last.  In this context, the current SPX forward multiple of ~20.5x makes sense until macro conditions change and volatility expands.

Ten-year bond yields are currently running into technical resistance levels near 4.33%.  A challenge of the cycle high at 4.99% looks highly unlikely given the Fed’s commitment to policy normalization and the Treasury Department’s change of heart on increased issuance.  The recent backup in yields looks like normal, courter-cyclical mean reversion in a developing long-term bull market for bond prices.

Narrow leadership continues to challenge the sustainability of the recent rally.  Healthy, sustainable bull markets are characterized by broad equity participation and cyclical sector leadership.  The cyclically-sensitive RTY has made four prior attempts in the last 18 months to break above range resistance near 2100.  A breakout in the RTY would be a very bullish development for the broader market.  The equal-weight S&P 500 (SPW) is in a similar position with a break above 6670 (+2% above current levels) serving as a bullish trigger.  And a new high for the Dow Jones Transportation Average (TRAN) above ~17000 (~7.5% above current levels) should eliminate remaining doubts about the health and sustainability of the rally.