Morning Notes — Unwinding the Rebalancing Trade

Bond yields: Ten-year Treasury yields remain just under the highs from 3/19.  Releasing through 1.74% would likely pressure growth equity multiples further and benefit cyclical/value stocks.  Growth stocks are outperforming this morning on an early reversal of the quarter-end rebalancing trade that started 3 weeks ago.  We expect this to last for more that one session with 10-year bond yields coiling below ~1.72% for the next 1-2 weeks before moving higher.  Expect sideways to slightly lower yields…maybe to 1.62%-1.64%.

SPX: The S&P 500 (SPX) is threatening an upside breakout after price trend deceleration in mid-March signaled a pullback.  The ~2.20% pullback was in-line with our expectation to be smaller in magnitude than the February episode that resulted in a ~4.5% downtick.  Today’s test of the highs follows our temporary yield consolidation theme from the prior paragraph.  The SPX is more heavily weighted toward growth and would benefit from a period of yield consolidation. 

NDX: The NASDAQ 100 (NDX) bounced off 12,200 in early March and continues to rebound from that support.  The NDX should be able to test its 2/12 closing high of 13,808 before struggling to move higher. 

SVX: The S&P 500 Value Index (SVX) should consolidate here as bond yields move sideways. Any pullback in cyclical/value stocks will be an opportunity to aggressively add pro-cyclical, pro-value and small cap exposure.  Keep the focus on Financials, Energy and Industrials as we move forward.