Morning Notes — Welcome Back

Near-term SPX: A Democrat surprise in GA this week would likely trigger a further decline in the US dollar, an increase in bond yields and some downside for the S&P 500 (SPX). We see immediate technical support for the SPX at ~3620, with stronger, secondary support in the 3510-3530 zone.  We’d use weakness to technical support levels as an opportunity to add cyclical/value exposure.  

Near-term SVX: We’ve had a pro-cyclical/value bias since mid-September based on our expectations for unprecedented monetary and fiscal support to outlive the pandemic.  This theme is good for the SPX, but better for the S&P 500 Value Index (SVX).  By mid-September it was apparent to us that Tech multiples had stopped expanding, the value/growth ratio was narrowing and the SVX looked like it was base building before a breakout.  It took a few weeks, but the SVX did breakout of long-standing technical pattern resistance on the November 9 vaccine data.  The key metric for further cyclical/value outperformance is the shape of Treasury yield curve.  A steeper curve will result in further SVX outperformance.  A 5-year/30-year Treasury yield spread in the 130-140bps looks like the sweet spot for SVX outperformance.  Levels above ~140bps would probably only benefit Financials, specifically banks.