Inside Markets — Waiting Mode

The S&P 500 (SPX) is currently trading below its 50-day moving average at 5506 that CTAs often use as buy/sell triggers. A close below 5506 may not immediately generate increased selling pressure, but would at least remove CTAs from the bids list ahead of a rolling buyback blackout window that begins on 9/16. YTD corporate buyback authorizations are the largest on record at $893B and now represent the largest single source of equity demand. The closing of the corporate buyback window could remove ~$312B in equity demand over the next month at a time when CTA exposure is skewed to the downside. With that said, the SPX keeps its bullish trend at levels above ~5442 but a break opens the door to support in the 5070-5175 range (~6.7% implied downside to the midpoint).

Equity markets are mostly in waiting mode ahead of tomorrow’s August Jobs Report that should inform market expectations for the size of a September rate cut. Consensus is looking for nonfarm payrolls of +165,000 with anything below +150,000 likely delivering equity downside and a sub-50,000 print would likely generate as much as 2% downside in the SPX. A payroll number above +300,000 would also generate downside in our view, which makes the risk/reward a bit challenging. Markets aren’t priced for a disappointment because the cooling in labor markets to date has been driven by reduced hiring as opposed to mass layoffs. Sharp increases in layoffs usually follow the beginning of a recession, but layoff notices from the WARN Act and announced Challenger job cuts have remained low through July.

The Nasdaq 100 (NDX) recovered from its payroll-induced pullback in early August but has lagged behind other major indices. Positioning in the NDX remains crowded and these are generally stocks with high forward multiples. We’d expect more near-term underperformance in the NDX as Fed policy normalization improves the relative attractiveness of cyclical laggards.