August 14, 2020
Bond yields: Ten-year Treasury yields hit an eight week high yesterday and 30-year yield broke through the 50 and 100-day moving average that CTAs sometimes use as a trigger. The ~1.40% level also looks like a near-term technical resistance zone. A sustained break above ~1.45% could lead to some momentum driven flows out of fixed income. And fixed income is the most crowded investment in the world at the moment. Bond yields and cyclically-sensitive equity groups are positively correlated, so higher yields would keep the pro-cyclical/value equity theme in place.
Short-term: At current levels, the S&P 500 is just 18 points away from its record high of 3393. Old highs are considered fairly strong technical resistance and with SPX momentum indicators ~2 standard deviations above their mean, we’re expecting a loss of momentum on the approach. That’s what we’ve seen since we first wrote about it on Monday. It’s possible that lower volatility, light attendance and lower volumes in August could combine with a news/catalyst vacuum to keep upside momentum in place, but there’s a higher probability for a fade.
Intermediate-term: Individual investors have been skeptical of the equity rally since the retracement began on March 23. It shows in all of the major sentiment and positioning indicators. Many professional investors have also been skeptical with equity hedge fund beta and CTA beta still well-below average levels. Markets don’t make a top when investors are skeptical. Markets make a top when sentiment is at bullish extremes and positioning is crowded, like bonds are now. Relative to bonds, equities are near all-time record low valuations and money market fund balances are at all-time record highs. Any fade based on technical resistance should be used as an opportunity to add broad equity exposure.