Morning Notes — Technical Resistance

The near-term technical resistance hurdle for the S&P 500 remains 3690 with the index currently above that level intraday.  We don’t expect much resistance there or at the next level near 3745. The first major zone of resistance is ~3900.  Lower nominal bond yields are likely required just to get the SPX to ~3900.  We see increased near-term probability for 10-year yields to fall ~25bp given events out of the UK and quiet macro calendar until next Thursday’s ECB meeting (10/27) and Friday’s September PCE report (10/28).

Beyond: Sustained closing levels above ~3900 will likely require terminal rate expectations to slide back toward 4.75%, which is the terminal rate implied by the Fed’s most recent dot plot. Terminal rate expectations are down 2.5bp to 4.91% today from a post-CPI high of 4.96%.  Equities and terminal rate expectations have had a strong negative correlation since April/May.  Getting through strong resistance in the 4100-4200 zone likely requires terminal rate expectations closer to 4.50%. Terminal rate expectations are the key cross market for equities in the intermediate term, but these cross market relationships tend to be short-lived.

Plaid: While it seems out of place to discuss now, it’s important to acknowledge that equity multiple expansion will eventually follow sustainably lower nominal bond yields. Expect Tech multiples to expand fastest on lower 10-year real yields. Ten-year real yields are now +157bp with levels below +95bp likely to produce outsized outperformance for the sector.