Inside Markets — Risk-Off

Today’s risk-off trade follows bearish momentum divergence signals late last week. The S&P 500 was in technically overbought territory when these signals triggered, and we expect the current sell off to extend until it reaches technical oversold levels. A close below 4110 sets the stage for a test of moving average support at 4035.  We expect downside momentum would accelerate on a break below that level. The +6% YTD gain in the SPX has been achieved on the leadership of only 28 stocks and marks the weakest breadth for any equity market since the 1990’s. We expect more crowding in mega-cap and defensive stocks before the index breaks lower.  Our calendar year forecast in December called for a retest of the lows near 3550 sometime in H1’23. Successful retests often include a sharp, intraday break below the old low. These market bottoms are characterized by capitulation selling of those former market leaders.

Our 10-year yield objective of 3.20% looks achievable in the near term as the market awaits an updated debt ceiling ex-date from the Treasury.  Past debt-ceiling debates from 2011 and 2013 came down to the wire, driving a flight to quality move worth 30bp in nominal 10-year yields.  A break below 3.20% would confirm the peak in yields from early March and set the stage for a more bullish equity outlook.