January 20, 2023
The S&P 500 (SPX) was unable to hold key momentum levels earlier in the week after weaker-than-expected data challenged the soft-landing narrative. This week’s reversal also occurred as the index moved into downward sloping technical resistance near 4000. These are the same technical signals that essentially contained the bear market all of last year and a breakout likely requires clear evidence of an impending Fed pivot. Evidence of a Fed pivot is usually first seen in a positively sloped 5/10 yield curve. The 5/10 curve inversion has narrowed significantly from its mid-October peak, but all bond maturities are now overbought and likely to reverse in the weeks ahead. In the near-term, downside momentum in the SPX likely accelerates on a break below 3865, which is roughly 2% below current levels. Ultimately, we expect a successful retest near last year’s low in the 3500s after the Fed decides to follow the forward curve with rate cuts in the second half of the year.