September 23, 2022
SPX: The S&P 500 (SPX) has returned to deeply oversold levels and now testing June lows at ~3660 with long-term valuation and technical targets just underneath in the 3500 handles. The near-term fundamental driver of this sell-off has been rising bond yields with yesterday’s 18bp increase in 10-year Treasury yields pressuring equities. Treasury yields are mixed today, but sharply higher UK Gilt yields into the weekend extends the sell-off. Ten-year Treasury yields have managed to stay below our target of ~3.75% and we look for lower yields to drive lower rate volatility, a narrowing of credit spreads and lower equity market volatility in the weeks ahead. The intermediate-term trajectory of the SPX has been largely determined by terminal rate expectations since Q4’21. The negative correlation has become stronger throughout calendar ’22 and terminal rate expectations are the primary cross market to follow.
Contrarian: Equity sentiment as measured by last week’s (ending Wednesday) AAII survey reached an all-time record bearish extreme with a bull-bear reading of -43.2 on record bearish equity sentiment of 60.9. Positioning indicators are equally stretched with the recently released Q2 Flow of Funds report showing US household equity positioning returning to 2018 lows.