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Morning Notes — Deeply Oversold Part II

Deeply Oversold Part II

September 27, 2022

Squeeze: The S&P 500 (SPX) is in deeply oversold territory and susceptible to another reflex rally in the 10-15% range. Internal breadth indicators show only ~3% of SPX stocks trading above their respective 50-day moving average and only ~11% of members trading above their 200-day moving average.  Sentiment measures are also at extreme levels with last week’s AAII sentiment survey at a bearish all-time record. And positioning is also stretched with CFTC non-commercial S&P 500 futures positions ~2 standard deviations into oversold territory.

When: Momentum dispersion usually precedes a reflex rally from deeply oversold levels. While these indicators are not yet present, we also see the potential for a reflex rally on a capitulation trade into strong technical support in the 3500s. The SPX is currently retesting the June lows in the 3640-3660 range and a break lower opens the door to add equity exposure in the 3500s. Reflex rallies tend to last about 4-6 weeks, which would take us well into a seasonally strong Q4.  A more sustainable rally probably requires inflation data to decelerate at a faster pace that what’s currently priced into forward swap markets. The next major inflation report and catalyst for markets will be the September CPI report due on 10/13.    

Something: The San Francisco Fed published a report yesterday that looks at the impact of remote work during Covid on housing and rents.  The conclusion is interesting with “the shift to remote work may account for more than half of overall house price increases and similar increases in rents.”  If the report’s findings are accurate, the recent push to bring workers back to the office would result in further deceleration in home prices.

Related: A number of reports over the last several days point to a potential softening of rental prices.  A report from CoStar showed national apartment rents down -0.1% in July, which was the first monthly decline since December ’20.  While the data lags, so does official government inflation data like CPI with this downtick in rents likely making its way into CPI sometime in Q1’23. Yesterday, Atlanta Fed President Bostic said the Fed is seeing more real time data for early signals.

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