June 30, 2021
The recent advance in the Nasdaq 100 (NDX) to ~14,550 has exceeded pattern objectives of ~14,400, driven largely by a flattening of the Treasury yield curve. Late yesterday, the 5/30 yield spread broke below strong secondary support at 120bps (118.5bps currently) with 116bps now in sight. Curve flattening is a late cycle/end of cycle dynamic that would correspond with painful rotation out of value sectors. That’s not happening, or at least not yet, probably because S&P 500 upside earnings revisions since mid-April have been led by Energy, Materials, Financials and Consumer Discretionary sectors. Earnings revisions (direction and rate) are consistently among the most predictive fundamental factors. While it’s unwise to disregard the recent pullback in yields and curve flattening, it also unwise to base investment decisions on a single indicator. Other indicators and cross-market signals (commodity prices, copper/gold ratio and interest rate projections in OIS forwards) aren’t yet confirming the late-cycle message from bond yields with many of our favorite cyclical/value positions showing strength at short-term oversold levels. Nonetheless, the cyclical/value equity bias should remain on hold unless/until curve steepening resumes. Old support levels become new resistance, which makes a 5/30 spread of 120bps the first hurdle.