Inside Markets — Technical Update and Outlook

The SPX may be nearing the end of the consolidation phase we flagged on October 7. Our primary concern during the consolidation would be the triggering of de-grossing by the systematic community where long equity positioning approached the 100th percentile at the end of September. The lack of a meaningful pullback during September (widely reported to be a challenging month) is likely what led to the stretched positioning on the part of CTAs and vol-control funds. October often delivers higher realized equity volatility and an SPX move below the 50-day moving average could trigger CTA selling. The SPX texted but didn’t trade through its 50-day moving average on October 10 (China tariff comments) and a potential move above the 10/8 all-time high would sideline the concern. And while systematic positioning is still stretched, broad equity positioning is now below neutral with hedge funds in the 39th percentile as of Friday’s close. We also note that bearish equity sentiment in last week’s AAII sentiment survey moved back to elevated levels.

Our outlook considers that Fed easing cycles in the absence of a proper recession have a history of delivering outsized (>15%) equity performance in the 12 months following the first rate cut.  Avoiding a recession isn’t assured, but the following are constructive signs: the Fed is easing, cyclical parts of the economy don’t seem to be rolling over and there is a massive capex cycle underway. Corporate capex could accelerate from here as R&D, equipment and some structural capex become fully deductible expenses. This is happening amid a backdrop that includes easy financial conditions (DXY lower) and a consistent financial impulse.