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Inside Markets — Resistance


January 30, 2024

The SPX is currently butting up against trendline resistance near 4925. From a technical perspective only, the SPX needs to maintain levels above ~4800 to stay intact with a break below likely coinciding with easy-to identify bearish momentum divergence. Currently, there are no technical indicators to suggest that a break below 4800 is imminent other than relatively narrow leadership at trendline resistance. Underwhelming Q4 results from members of the ‘Magnificent 7’ would be the most likely near-term fundamental driver of a ~5-7% pullback that could take the index to first level support near 4610. Notwithstanding a near-term break below ~4,800, we continue to take intermediate-term cues from the cyclically-sensitive Russell 2000 (RTY). The RTY remains in consolidation mode below key resistance levels near 2040. RTY levels north of 2040 would suggest broader participation for a more durable bull market.  However, a break above 2040 would also signal an imminent cyclical recovery, which seems unrealistic given deeply restrictive real yields.

A Fed pivot should be preceded by a noticeable steepening in the 5/10 yield curve by 1-2 months. We lean more heavily on the shape of the 5/10 curve as an indicator than the market-based probability priced in OIS markets.  Currently, the 5/10 curve has a positive slope of +5bp, which remains below resistance levels near +19bp. In our opinion, a sustained break above +19bp would precede a Fed rate cut. We look for the 5/10 curve to break above +19bp sometime in April or May with the first rate cut at the June Fed meeting.

Monetary easing and disinflation remain dominant bullish equity themes at the moment. In short, the SPX and Nasdaq 100 (NDX) are currently priced for strong earnings growth, six rate cuts in 2024 and a continuation of strong economic growth.  The narrative of rates is currently expressed through an optimistic lens, but this could quickly shift to impatience in the Fed’s reaction function once growth data begins to slow. Survey results tend to lead hard data by 1-2 months and the significant deceleration in January regional Fed surveys has caught our attention.  Ultimately, we expect investors will choose to look across the valley if/when the growth data turns, but the process is unlikely to be as easy as markets currently expect.

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