Morning Notes — Near-Term SPX

Near-term SPX is heavily dependent on terminal Fed Rate expectations.  The S&P 500 (SPX) faded from our 3900 resistance level this week as terminal rate expectations rose into and out of Wednesday’s Fed meeting. Technical support now sits at the 3650 level with a break opening the door to a retest of the 3520 low. We maintain our near-term bullish view at levels above 3650, but expect any retest of the lows will likely be successful as the bullish technical signals that had us looking for a Q4 rally from the 3500’s remain firmly in place. Of course, macro fundamentals can overwhelm technical signals with next Thursday’s CPI print likely to impact terminal rate expectations.  This week’s Fed statement was inline with expectations, but a hawkish Powell press conference moved terminal rate expectations to a new high of ~5.15% and pushed the timing out from March to June.  But realized inflation data moves terminal rates, which ultimately determines Fed policy, not the other way around.  This makes CPI the key variable with two softer than expected prints changing our Q4 counter-trend rally thesis into something more enduring (through ~4200). The recent relative outperformance of small cap stocks and value sectors could be an encouraging sign that 3520 will end up being the ultimate low for this cycle. We see the potential for further multiple contraction in Tech, but at a slower pace as real yields now look toppy.  At this point, we’re expecting a better entry point after software companies cut their 2023 guidance during Q4 earnings calls in late Jan/early Feb.