May 26, 2020
Chartist: The S&P 500 is currently trading above key technical resistance at ~2950, above its 200-day Moving Average and above some popular CTA triggers levels…intraday. Cyclical sector outperformance is also an encouraging internal development this morning, but the close matters most. Sustained closing levels north of ~2950 will go a long way to repair technical damage incurred during early-March, while the prospect of CTA fund flows can take the SPX to 3100. At that level, we expect the z-scores for our momentum indicators to reach 1.5σ, which would technically qualify as ‘overbought.’
Liquidity: US money supply has increased ~16% over the last 2 months (compared to ~8% increase during the first year of the financial crisis) and is the key driver of the equity rally to date. We think the additional $2.5T in money supply outside of banks may only be the beginning as Fed liquidity facilities continue to ramp. Equities discount events 6-9 months in the future and now re-rating higher based on the increased money supply and little competition from the other asset classes. When the fog of uncertainty lifts, the money will need to go somewhere. The yield on cash is 0%, the yield on a 10-year Treasury bond is ~0.70% and equities have a long-term nominal return expectation in the high single digits.