Morning Notes — Contrarian View

SPX: Short-term oversold conditions and an emerging peak-central bank theme have managed to hold the S&P 500 above technical support at ~3900.  Prior support at ~4100 failed after terminal rate expectations approached 4% (now 3.93%) in the wake of Powell’s more hawkish Jackson Hole address in mid-August. Terminal rate expectations have been the driving force behind every rally and sell-off since mid-April. Next Tuesday’s CPI report has the ability to drive terminal rates in either direction. Forward looking indicators of CPI (PPI and the ISM new orders/inventories) have clearly peaked and another soft CPI print would take terminal rates lower/drive the SPX higher. An in-line/elevated CPI number next Tuesday would likely take the SPX below support in the 3900 area to retest the June low at 3660.

More: Extreme bearish equity sentiment, light positioning indicators and outsized attention this year on September seasonal weakness support a bullish contrarian view. Downside earnings revisions following Q2 earnings revisions is normal as sell-side analysts adjust overly optimistic estimates for the year ahead.  These downside revisions every August/early-September are a potential driver of the statistically questionable September seasonal weakness. Yesterday, we explained how this year may be different in that out-year estimate cuts began earlier than usual (May-July) and how post-Q2 revisions may serve as a de-risking event for equities.