Discussion
I should have included the following graphic in the note yesterday.
I very specifically upgraded the tactical outlook because with SPOOZ sitting on the 20dma and cross-asset signals absorbing the hit from higher rates very well, this is a high probability set-up for a 5% rally from here over the next 8 weeks to circa SPY $545.
The most important signal driving this high probability is the benign action in IG CDX. For reference, the last time UST 30s were above 450 bps last September, IG CDX was over 62 versus 52 today. That is a very large divergence that tells me one of two things: either rates are likely to stall here and/or meander down, or rates need to go a LOT higher to impact the equity market.
And for recent reference, back in January when rates started to take off SPX corrected a bit down to the 20dma and then worked higher alongside UST 30s, rallying more than 5% in just a few weeks.
Lastly, if you notice in the chart above, SPY’s price/100dma is around 107%, down nicely from its February high of over 110%. In the 2020-2021 FED/Treasury-engineered rally SPX didn’t run into trouble until price/100dma got up to around 115%. So, as long as it can stay below 110%, the Index should be able to continue grinding higher in a methodical fashion.
(For reference, as I’m hitting send on this at 10:06am EST, the market has started moving higher on lower than expected services prices paid data. I started writing this back around 9:30, so the bullishness of the write-up has nothing to do with current price action.)