October 25, 2023
Earnings are in focus after an unusually high number of overnight disappointments. Downbeat sentiment also follows a resumed backup in bond yields that’s helped by stronger new home sales as bad signs for the economy pile up. September new home sales were well ahead of expectations, up +12.3% MoM vs. August’s -8.2% decline and consensus for a +1% gain. The report is a bit of an outlier given recent weakness in other housing-related data including September existing home sales and October NAHB builder confidence.
The S&P 500 (SPX) is currently trading below 4200, which was the level that contained the index for the better part of a year between mid-22 and mid-23. Old resistance becomes new support and the potential for a sub-4200 close will likely drive further downside. Closing above 4200 would backfill equity sentiment at a time when markets are supposed to rally into year end. Our concern about participating in the Q4 rally centers on the precarious grip the Nasdaq 100 (NDQ) and NYSE FANG + Index (NYFANG) have on their respective support levels. Cyclical indices have all broken support following bearish distribution patters that developed this summer. In our opinion, the breakdown in cyclical indices is a negative signal for the state of US economic growth in coming months. We also note that we’re 16 months into an inverted 2/10 yield curve, which has a perfect track record in predicting recession-driven bear markets 19-24 months after initial inversion. These are bad signs for the economy. The SPX, NDX and NYFANG have developed similar distribution patterns as the cyclical indices, and we remain concerned they’ll break support in coming weeks. The NYFANG is the index to focus on with a break below 7175 leading to a rapid repricing lower as crowded positions look to lock in gains into year end.