October 20, 2022
According to the latest Zillow update, home sales in September fell -18% MoM with a sharp deceleration in activity at the end of the month when mortgage rates were at highest levels. A separate Redfin update included similar numbers and provided a downbeat assessment on current conditions.
Contrarian: Retail investor cash in money market funds has increased $140B this year, and after 10 straight weeks of inflows now stands at $1.55T. Asset managers are currently holding 6.3% of assets in cash, which is the highest level since April 2001. Cash looks like a crowded trade, hedge fund long positioning sits in the bottom decile, systematic strategies CTA are similarly positioned and all sentiment indicators are at bearish extremes. The pain trade is higher and so are the buyers.
SPX: The S&P 500 (SPX) has backed up over the last two sessions as the index consolidates gains following last Thursday’s upside reversal from technical support in the 3500s. The consolidation comes as terminal rate expectations have crept back toward 5% and the SPX will have a hard time holding gains if rate expectations move much higher. Risk remains skewed to the upside and the resiliency of the index amid higher terminal rates underscores the upside potential once rates decline. There’s some mild technical resistance at ~3800 with some popular CTA buy triggers just above that level. We see 3900 as a more significant hurdle, which likely requires terminal rates to drift toward 4.75%. But given the presently stretched positioning dynamic, any downtick in terminal rates will likely result in accelerated upside momentum.
Catalysts: Tomorrow’s PMI data could move the needle on terminal rate expectations, but markets may have to wait until the Fed meeting on November 2 or October CPI on November 10. Looking at the components and their respective lags, we expect headline may decelerate from its September reading of +8.2% YoY to +6.9% in December (reported early January) and to +3.2% my mid-year’23.