February 3, 2023
The S&P 500 (SPX) has extended beyond the upper-end of technical resistance at 4100, despite a still challenging fundamental and macro backdrop. Light positioning into an anticipated Fed pause has driven the SPX into overbought territory over the last two weeks. The move off the October low was based on a dovish repricing of terminal rates. The rally off October lows made sense given that higher terminal rates last spring kicked off material downside in all major indices. Terminal rates stopped repricing in mid-December and that tailwind is now dependent on rate cut expectations in the forward curve. Expected future rate cuts are predicated on a larger Fed policy mistake and further deterioration in macro fundamentals. This increases the risk of equities hitting an air pocket, especially when overbought. A sustained move below 4100 would be a bearish near-term signal with a break below 3890 putting the index on track for a retest of last year’s low. Maintaining levels above 4100 with a sustained break above 4210 would be a bullish technical signal, particularly when led by cyclical sectors and industries like Transports and semis.