Inside Markets — Improved Conditions

We suspended our tactical bearish bias back in early June based on improved market breadth, cyclical sector leadership and a break above technical resistance at 4200. Market breadth continues to improve and cyclical sectors lead, but at a much slower pace.  The onus for further internal improvement requires macro and micro data to remain strong. This is a busy week for both.

CQ2: The S&P 500 (SPX) gained +0.7% last week and made a new YTD high at 4,565 on Wednesday. The move was driven by stronger than expected earnings from Financials with regional banks finishing the week up +7.2%.  Bank management teams also called out consumer resiliency and ongoing stability in credit quality. On the other hand, NFLX and TSLA both fell ~10.5% in the two days following their earnings reports.  This is a busy week for earnings and particularly for mega-cap names with GOOGL, MSFT, META, APPL and AMZN scheduled to report.

SPX: The aforementioned YTD high of 4565 also happens to be technical pattern resistance for the SPX.  Last week, the index decelerated on the approach to 4565 and it was apparent the level would hold.  There are still no signs of bearish momentum divergence, but view 4565 as the ceiling given weaker equity flows and relatively elevated positioning indicators.

Fed preview: The market widely expects a 25bp hike on Wednesday with no change to the forward guidance about ‘determining the extent of additional policy firming that may be appropriate.’  Consensus is looking for a ‘hike and pause’ meeting, meaning that Powell’s press conference needs to include some dovish-leaning commentary.

Together: The combination of marginally hawkish Fed and underwhelming mega-cap Tech results would be catalysts for a pullback in the SPX. The bar has moved a bit since last week, but the SPX maintains its bullish pattern above 4325.  A break below that level would lead to accelerating downside momentum.