Morning Notes — Narrative

The SPX has rallied ~5% from its coronavirus-induced low to record highs, largely on defensive sector leadership. It’s our view that cyclical sector leadership is required to sustain new highs in the broad market. Cyclical strength today is encouraging but also notable as only the third such session out of twelve since the 1/31 low. The German DAX remains the only cyclically-sensitive index to actually ‘confirm’ new highs in the S&P 500 (SPX). The Philadelphia Semiconductor Index (SOX) has eked out a new high, but we’d like to see a more meaningful advance before adding broad equity exposure. We also continue to watch the Nikkei 225 (NKY), STOXX 600 Auto Index (SXAP) and 10-year Treasury yield for confirmation with levels above ~1.70% probably tipping the scales in favor of cyclical/value rotation.

The bullish narrative assumes the economic drag from coronavirus will be largely confined to CQ1 and Trump will win a second term.