March 3, 2023
Fundamental reasons to explain the recent resiliency of equities to sharply higher rates have been difficult to identify. The best explanation for the month-long phenomenon seems to be light equity positioning or maybe better explained as overcrowding in cash. And markets have a tendency to move in a direction that creates pain for investors in crowded trades. The resiliency in equity markets amid higher rates has been impressive. Yesterday we asked what would happen to equity markets on a day when bond yields fell and today we have the answer.
Yesterday, the S&P 500 (SPX) staged a rebound from short-term oversold levels just above its 200-day moving average. Levels below the 200-day average would have likely triggered additional selling volume from CTAs and other systematic funds. An estimated $50B in selling volume from systematic funds would have challenged next level technical support at 3880. Avoiding closing levels below the 200-day moving average has at least deferred near-term downside momentum. The SPX is now lifting from oversold levels with an increased likelihood of returning to technical resistance in the 4100-4200 range. The upper end of that range continues to look unsurpassable without a change in macro fundamentals or imminent Fed pivot. We use a positively sloped 5/10 yield curve as our forward-looking indicator for an imminent Fed pivot. That segment of the yield curve is still deeply inverted with a negative spread of 29bp matching levels from early October. Returning to the 4100-4200 range would likely take the index right back to short-term overbought status. At that point, a still-inverted 5/10 yield curve would likely signal asymmetric downside risk for the SPX.