Inside Markets — Oversold Rebound

Last week’s ~3% decline in the SPX followed a ~12bp backup in 10-year yields amid an upside retail sales print and more hawkish Fed messaging. This week’s relatively light macro calendar (PMIs tomorrow and PCE on Friday) is unlikely to shift the hawkish narrative but should also limit further upside in yields and take some incremental pressure off equity markets. The pendulum on Fed rate expectations may have also overshot reality with OIS markets now priced for only 38bp of cuts in ’24. We remain patient on adding bond duration at this point but should see greater stability in bond markets going forward.

Tech was the worst performing sector last week after disappointing results/guidance from ASML, INFY, NFLX and TSM generated some profit taking in an extremely crowded group. Perceived AI beneficiary SMCI was the best example of last week’s aggressive unwinding with the stock selling off more than -20% after the company announced its earnings date without a positive preannouncement.

It’s still very early in earnings season, but last week’s aggregate price action suggests a high bar FY’24 guidance in particular. And despite above-trend GDP forecasts, recent policy uncertainty and inflation concerns could encourage more conservative management guidance.

The SPX broke pattern support at ~4980 on Friday, which opens the door to further downside from a technical perspective. CTAs started to de-lever last Monday when the SPX broke below its 50-day moving average at ~5118. CTAs use extremely basic buy/sell triggers with more de-levering likely to follow a break below the 100-day moving average at ~4935. Many stocks have already reached short-term oversold levels, but we maintain a tactically bearish and cautious outlook below ~5118.