March 30, 2023
Calls for increased bank regulations fit the disinflation and recession narrative, driving the rotation into growth equity sectors. Light equity positioning and depressed equity sentiment keep the pain trade aimed higher for now. A recent sell-side report estimated that CTAs have sold $150B of equities this year and net-short by $30B. Sidelined cash is near record and yesterday’s AAII survey recorded a sixth-straight week of elevated bearish equity sentiment.
Yesterday’s price action resulted in the NASDAQ 100 (NDX) entering bull market territory defined by a 20% advance from recent lows. The recent rotation into Tech and the NDX makes sense given our outlook for lower bond yields. The rotation also benefits the S&P 500 (SPX) given its heavy Tech weighting, but both indices have now moved into strong technical resistance levels that should cap the rally given the current shape of the 5/10 yield curve. A positively sloped 5/10 curve is our early signal of an imminent Fed pivot and potential cyclical recovery. A bull market designation for the NDX seems premature with Fed officials advocating more tightening amid elevated risk that something else in the economy breaks.