Morning Notes — Reflex Rally

We were surprised to see the S&P 500 (SPX) break technical range support near 4,100 amid record bearish equity sentiment and extremely light positioning. It doesn’t take much to rally markets with such deeply oversold conditions with only 15% of the SPX holding above their 50-day MA.  This was the level that matched oversold reflex rallies even during 2000 and 2007 bear markets.  Yesterday’s intraday low also reached the 38.2% Fibonacci retracement level of 3850, before recovering.  A number of macro hedge funds likely used the 38.2% retracement as a reasonable place to cover short positions. And while the press attributes this morning’s rally to hopeful Covid headlines out of Shanghai, we think it has more to do with yesterday’s third session of heaving selling in super-large cap Tech (AAPL, GOOGL and MSFT).  These stocks were the last remaining holdouts that for long investors with the break to cycle lows interpreted as necessary/healthy capitulation.