Inside Markets — SPX Levels

The SPX touched its rising 50-day moving average near 5126 yesterday before reversing to close slightly below that level.  Moving averages are popular buy/sell triggers for CTAs and other systematic strategies with the 4/15 break below the 50-day average (then 5118) leading to accelerated downside.  Most CTA strategies are trend-following, which means they add long exposure in rising markets and add short exposure in down markets.  The five-month-long rally from November has left CTA long positioning near record levels.  We remain ‘tactically bearish’ until the index can sustain closing levels above its 50-day average now at 5126 and make note of the rising 100-day moving average currently at 4970. In our opinion, a break below the 100-day moving average could bring longer-term support at ~4800 into view.

The CBOE Volatility Index (VIX) remains at subdued levels below 20.  Upside breaks above 20 will create a headwind for equity rallies with higher levels likely to erode the current 21x forward SPX multiple.

The current ~5% pullback in the SPX from the late March peak was driven by rising bond yields.  Equities can usually tolerate a slow and steady backup in yields but become vulnerable when a 2 standard deviation yield backup occurs within a ~30 day window.  In the current environment, a 2 standard deviation event for 10-year yields is worth ~40bp, which is what happened during the month of April.  The ~5% pullback in the SPX also matches the historical average when these events occur.

Ten year yields currently sit at 4.66% with last Friday’s reversal from 4.73% generating a high-frequency momentum divergence signal.  Almost all significant turning points include momentum divergence, but many momentum divergences only generate small moves.  What we can say is that 10-year yields have flashed an encouraging sign with a break below 4.46% suggesting a more lasting trend.  Tomorrow’s Fed meeting/Treasury refunding and Friday’s April Jobs Report could be important catalysts.