Morning Notes — SVX Upside

The S&P 500 Value Index (SVX) has been relatively resilient over the past ~2 months, despite lower bond yields and curve flattening.  Nominal 10-year yields have declined 37bps (23%) over the last two months and the SVX is essentially unchanged.  The main reason for the resiliency is earnings growth with the strongest Q2 beats coming from companies in Materials and Financials sectors. The other big winner during CQ2 earnings season thus far have been Consumer Discretionary companies, specifically apparel retailers.

More: The S&P 500 Value Index (SVX) has built a base above technical support near 1400 and now looks ready to push higher.  Decelerating downside price trend momentum triggered a buy signal on Wednesday and waiting for confirmation from the yield curve.  Once confirmed, we conservatively expect the SVX will push to the mid-1500 level in the near-term, suggesting ~11% upside from current levels.  The 5/30 year yield spread currently sits at 119bps, and we’d like to see sustained levels north of 120bps before adding broad cyclical/value equity exposure.  Financials and Materials are still the most attractive and admit to recently adding a chemical producer generating a 16% free cash flow yield trading at 5x EBITDA.