July 19, 2023
The S&P 500 (SPX) has reached the upper end of technical resistance in the 4515-4565 range. A close above 4567 with cyclical and small cap leadership would accelerate the pain trade and extend the recent rally. Unfortunately, today doesn’t look like the day for this to happen with cyclical groups under pressure following downbeat housing starts.
Markets have been front-loading the end of the Fed’s hiking cycle with an expected July hike widely thought to be the last. Bond yields usually peak 1-2 months before the end of a hiking cycle and the yield curve begins to steepen. Bond yields have come off recent highs with subtle curve steepening, but more will follow once the Fed signals an end to the hiking cycle. Stocks have also reacted positively to the end of past hiking cycles. Cyclical sectors usually lead with Financials, Industrials and Materials outperforming over the ensuing ~6 month period. Industrials have been the primary beneficiary of the broadening rally from late May with Financials now looking like the ‘catch-up trade’ given better-than-feared Q2 earnings and lopsided positioning.