Morning Notes — Cyclical/Value Pause

Decelerating price trend momentum in the S&P 500 (SPX) from mid-February resulted in a pull back to technical support in the 3700-3750 range (real support as low as 3620). Thus far, the SPX held that level and the NASDAQ has held it’s support level in the 12.200-12,400 range.  To date, the price action is consistent with a consolidation within a bull market. If those support levels hold, expect both indices to rebase at current levels before moving higher.  We’ve held a pro-cyclical/value bias since mid-September when real yields bottomed. Tech multiples stopped expanding in late August, but they didn’t rerate lower until three weeks ago when 10-year Treasury yields broke through technical resistance at ~1.45%.  The forward OIS curve now implies an early-2023 Fed rate hike, which is almost 12 months ahead of what the Fed is communicating. The bond market is now extremely oversold as 10-year yields approach strong secondary resistance in the 1.61-1.70% range.  Expect bond yields to consolidate in the near-term with support at ~1.34%. If 10-year yields short-term mean revert as expected, the NDX will likely test the February highs of 13,800, which is ~8% above current levels.  Cyclical/value outperformance should pause as the NDX finds its footing over the next ~4-6 weeks.  We’d use the pause to add cyclical/value exposure as favorite names reach short-term oversold levels.