Inside Markets — Failsafe

Today’s rebound in the momentum factor follows yesterday’s low-volume ~6.4% selloff in the group. Factor declines that register >2 standard deviations (sigma) are usually followed by a sharp rebound and yesterday was a 2.7 sigma move. As the fourth momentum unwind this calendar year, the current episode is notable in the apparent lack of a major catalyst. In our view, it may have been partially driven by seasonal forces. We note a 10-year average drawdown of ~7.6% for the momentum factor. De-risking and unwinding crowded positioning ahead of NVDA earnings next Wednesday is a major part of the dynamic with options markets currently priced for a ~6% move post-EPS.

The lack of an identifiable catalyst doesn’t mean one isn’t lurking under the surface. We note the bearish technical signals that typically precede the unveiling of negative catalysts aren’t currently present, but the SPX is now testing 50-day moving average support and the lower end of tis trend channel at ~6700. Moving averages and trend channels are usually low on the list of technical indicators, but closing levels under ~6700 would be an unwelcome development in what has been an orderly, low volatility rally since mid-May. Key near-term technical support sits at the September/October range low between 6520-6530. In our view, a break below 6520 would confirm trend reversal and invite further selling pressure to the ~6140 high from February.