Morning Notes — Short-Term Overbought

SPX: The S&P 500 (SPX) is short-term overbought with extreme/elevated bullish sentiment as primary near-term concerns. At the moment, there’s no evidence of sector/cross market divergences or momentum deceleration that often precedes corrective price action.  Without these signals, mild downside over a longer period of time could produce inevitable short-term oversold conditions that create easier entry points.  That entry point probably lines up with technical support for the SPX in the ~3510-3540 range. Our preference is to add positions in cyclical/value sectors on a coincident pullback in bond yields.  US 10-year yields ran into resistance on the approach to 1%, but should find initial support around ~0.78%-0.82%.

Catalysts: The last full week of 2020 includes a number of important catalysts with central bank policy announcements (Fed on Wednesday) and a busy economic calendar. Consensus is looking for the Fed to give guidance on QE but stop short of increasing the weighted-average maturity of its portfolio.  An outcome that includes an increased average maturity of holdings could produce downside in bond yields.  The most important economic data includes: 1) China November activity data and US Industrial Production tomorrow; 2) December flash PMIs for the US and Eurozone on Wednesday and; 3) US weekly jobless claims Thursday. Disappointing data this week would also help bond yields mean revert.

SVX: Rapid multiple expansion for Tech ended with CIEN’s bad forward guidance on September 3.  Since then, the S&P 500 Value Index (SVX) has returned +10.51% vs the S&P 500 Growth Index (SGX) up +3.95% and the Nasdaq 100 (NDX) up +5.33%.  The SVX broke out of long-standing technical pattern resistance on the November 9 vaccine data, adding conviction to our cycle/value bias that began in mid-September.  The shape of the yield curve will ultimately determine the future relative performance of the SVX.  Expect accelerating relative SVX outperformance should the 5-year/30-year spread widen beyond ~140bps with banks as the primary beneficiary.