Morning Notes — Early Indicator

Cyclical/value sector leadership still depends on bond yields moving higher.  US Treasury yields hammered out cycle lows in late-July/early-August with the 10-year yields making a double bottom after failing to break through pattern support at ~1.12%. At the moment, 10-year yields look ready to test resistance levels at the 1.40% level, and expect the first attempt will fail before pushing into the 1.80%-1.90% range later this year.  Cyclical/value outperformance also depends on curve steepening.  Currently at 110bps, the 5/30-year Treasury yield spread remains above support at ~108bps with near-term resistance around 116bps.  A spread north of 124bps is probably required before cyclical/value sector outperformance gains attention and momentum.  We still prefer adding equity exposure in cyclical/value sectors based on fundamentals, but would add conviction if yields break though ~1.46% and/or the 5/30 spread breaks through ~124bps. The basing of yields and spreads above support is encouraging, along with the recent upward inflection in the Copper/Gold ratio. The Copper/Gold ratio has a strong positive historical correlation with cyclical/value sector performance 1-2 weeks out.