Inside Markets — Bond Yield Reprieve

This morning’s bond yield reprieve is helping the CBOE Volatility Index (VIX) come off highs approaching our ‘elevated’ threshold of 22. The VIX traded as high as 23 this morning as 10-year yields crossed above 5%, but is now back to a less-ominous reading just below 20. Closing VIX levels north of 22 will act as a headwind for rally attempts and further dent market sentiment.

Equity sentiment is nowhere near bearish extremes and shouldn’t be considered a bullish contrarian signal.  The American Association of Individual Investors (AAII) sentiment survey from last week showed a roughly equal percentage of respondents identified as bullish and bearish. Broad positioning indicators are also far from extreme levels but last week did mark the third straight week of >2z net selling by hedge funds, suggesting that crowded short positions are due for a near-term rebound.

US equities are always sensitive to changes in bond yields and the recent backup is mostly responsible for the -8% decline in the SPX since late July. The Fed’s pre-meeting blackout window should take near-term pressure off the yield curve, which should help the SPX bounce off technical support near 4200. This is a busy week for mega cap Tech earnings with MSFT, GOOGL, META and AMZN due to report. Uncontroversial reports from all four should lift the NYSE FANG+ Index (NYFANG) off levels near support at 7175. Ultimately, we expect resumed bond market volatility to spill into the stock market with a spike in the VIX pushing the SPX below 4200 and the NYFANG below 7175.