Market Journal: 1987 On the Mind

Discussion

The sharp upward reversal today in UST 10s and 30s today in response to a supposedly “Golden Path” NFP report says that long-term rates are headed higher, and given the size of the move in UST 30s specifically, as discussed at the beginning of August the 1987 analogue is very much in play here. Fleshing the analogue out a bit, the decisive lower high in 200dma breadth, and the move into positive territory by the widely followed MACD line, looks eerily similar to 1987 - to the point where SPX could be topping out right here and now. However…

In 1987 it took a decisive move to new highs in UST 30s for SPX to finally crack. Even after today’s sharp move higher we’re not there yet with rates. As such, I think the analogue needs a bit more time to play out.

The bearish divergences cited yesterday appear to have played out, as SPX has closed the gap with HY CDX after failing to move decisively higher in response to the “Golden Path” NFP report. Today, breadth is positive, HY CDX is down, and defensive sectors are sharply underperforming, which suggests SPX probably has a bit more work to do on the upside before its final descent.

Exhibits

Violent reversal in rates today in response to a “Golden Path” NFP report that immediately sent the market narrative into a tizzy about the end of FED rates hikes.

SPX breadth and MACD today look eerily similar to 1987. One last spike to new highs in UST 30s oughta send SPX back to its October 2022 low in short order…

But in the very short-term SPX has closed the gap with HY CDX…

…Breadth is positive…

…And defensive sectors are sharply underperforming.