October 18, 2023
Geopolitical concerns are getting more attention after an explosion at a Gaza hospital complicates diplomatic efforts to ease the Middle East conflict. Oil prices are higher but off best levels after Iran’s foreign minister called for an embargo against Israel. Bond yields continue to rise after yesterday’s retail sales number pushed 2, 5 and 10 year yields to closing cycle highs. Today’s uptick follows a firm UK CPI report and reports the White House is preparing a ~$100B emergency funding request for Ukraine/Israel aid and border security. A busy day of Fed speakers with Waller, Williams, Bowman, Barkin, Harker and Cook on the calendar. The Fed’s Beige Book is due this afternoon.
The Russell 2000 (RTY) is lower again today after a two day respite. The RTY is a small cap index that serves as market-based proxy for the economic cyclical. Small-cap companies are often more labor intensive than large-cap peers and have a tendency to use more floating rate debt. The RTY is the worst performing major US benchmark, down -13% since bearish distribution patterns began to form in late July. All major US benchmarks have formed bearish distribution patterns since late July with the SPX clinging to support levels north of 4200. The NDX and mega-cap NY FANG+ index (NYFANG) have formed bearish distribution patterns as well, but appear several weeks behind the SPX.
The ten constituents in the NYFANG index have strong secular growth characteristics and are generally less susceptible to rising labor/borrowing costs. Unfortunately, the relative advantages these companies enjoy is leading to investor crowding, which is a defensive dynamic that often occurs at the end of a cycle. The distribution pattern in the NYFANG begins to break down below 7175, which is ~4.5% below current levels. A break in the NYFANG would likely result in accelerated bearish momentum for the broader market.
Elevated levels of realized equity volatility are the primary near-term concern. Closing VIX levels north of 22 are considered ‘elevated’ with a breach leading to increased conviction in our tactically bearish outlook.