Morning Notes — SPX, NDX and SVX

SPX: Yesterday’s afternoon fade in the S&P 500 (SPX) looked like CTA selling and it’s important to see if the SPX can hold early gains without incremental drivers to shift the narrative.  The SPX hasn’t quite reached oversold levels, but expect it to get there in time as it builds a base just above secondary support near 4500.

NDX: Sentiment on Fed policy has become extremely hawkish, which increases the probability for a dovish surprise at next Wednesday’s FOMC.  On Tuesday, the NASDAQ (NDX) broke near term support in the 15,570-15,700 range as 10-year yields extended through resistance at ~1.78%.  A break below ~15,000 (now ~15,200) probably takes the index back to the 14,570 level.  Tech isn’t our preferred sector as we start the year, but the NDX would stage a meaningful relief rally on a dovish Fed surprise next Wednesday.  Treasury prices have reached extreme oversold levels, which should temporarily stall the recent backup in nominal/real yields, giving Tech and software stocks some time to recover.

SVX: As expected, the S&P 500 Value Index (SVX) hasn’t been immune to the sharp back up in bond yields.  The SVX has clearly outperformed since the beginning of the year, down -0.91% vs. the SPX -4.84% and NDX -7.78%.  Our 15-month long preference to add incremental equity exposure in value sectors was based on expectations for higher nominal bond yields. Our concern for multiple contraction in Tech, particularly software, was based on expectations for higher real yields. Our outlook for a more sustained cyclical recovery (see yesterday’s notes) should keep the Fed tightening policy until 10-year real yields rise above zero. After a brief period of consolidation, we expect nominal and real yields will extend higher into Q2’22 with value sectors outperforming.