Discussion
Today’s move in rates is just really important, and while the old adage is “if an asset doesn’t respond to a piece of data like it ‘should’, then it’s likely to move the other direction” could be applied to SPX today, I think EOM/BOM dynamics and VOL pinning are the key drivers masking the bearish developments beneath the surface. As such, it’s important to monitor divergences and tells for clues about the market’s true response to the surge in rates.
#1: A key tell for me this morning was watching a former equity bear parading around FinTwit bragging about his intra-day market calls. It’s absurd to brag anyway, let alone after having been wrong for a long time; but it’s especially absurd to brag after being wrong for a long time as the market heads into the teeth of a substantial re-hawking of monetary policy.
#2: Defensive sectors have perked up today despite the surge in rates. Sentiment around defensives is rock bottom, with strategists across the “Street” abandoning them left and right, and with central banks aggressively re-hawking, I remain steadfast in my long-held defensive sector bullishness until the 3y/10y UST curve moves back to parity alongside a rise in the unemployment rate to at least 4.5% (see March 31 Outlook below for a discussion about the necessary conditions to declare SPX is in the zone of a durable bottom). Perhaps this is a 1970s redux where defensive sectors are not the place to hideout during recession, in which case I’ll be wrong. But given the very sporadic performance of Industrials, Discretionary and Energy - cyclical sectors one would expect to rip in a high inflation environment - I am not at all convinced that this move down in defensive sectors is not just the result of an obvious recession failing to come through in the coincident data in a timely manner.
In my opinion, the way the bond market behaved around the SVB crisis was a strong “tell” for the likely nature of the upcoming recession - that being, materially more deflationary than widely believed, in which case defensive sectors should ultimately perform more in line with the 2000-2002 and 2007-2009 recessionary bear markets.
#3: And lastly, this little call selling tidbit from Joe Kunkle.