Morning Notes — Direction Likely Next Week

The S&P 500 continues to trade near record highs on defensive sector leadership. Record highs in the broad market are probably unsustainable if they’re not confirmed by record highs in cyclical indices. The recovery from the 1/31 coronavirus-linked low has included several days of cyclical leadership and there’s reasons to be encouraged by a slight new high in the German DAX and Philadelphia Semiconductor Index (SOX). Also reason to be encouraged by downside price trend deceleration in WTI crude and the Energy sector, but we’d still like to see more. The easiest leading indicator to follow is probably the 10-year Treasury yield with levels above ~1.70% looking technically significant. The current yield on the 10-year is ~1.58%. The most recent EPFR data shows investor inflows into fixed income mutual funds and ETF reached a record $23.6B last week. Mutual fund and ETF flows are generally considered a contrarian sentiment indicator and while record inflows are encouraging (suggesting risk-aversion by an emotional investor group), equity sentiment is relatively bullish (also contrarian) and of no particular use at the moment. We expect to have more direction next week with improved coronavirus data, a PBOC rate decision Thursday and maybe some clues in February flash PMIs Friday. It’s a close call but we’re likely to make it next week.