Discussion
In a July 28 Market Journal update I posited that a 1987-like divergent SPX high could emerge sometime in August alongside rising rates, one that would set up a “surprising” move to SPX 3000-3500 by October 31. All market and macro analysis really is at its core is historical analysis, but over-reliance on analogues as specific as the 1987 crash is fraught with risk. However, because history tends to rhyme, specific analogues can be useful to frame a particular set of market conditions.
I don’t have time to delve deep right here and now, but it’s useful to consider the SPX pattern alongside rising rates into the October 1987 peak as a lens through which to interpret the current market set-up. In short, as UST 30s started to take off in late March 1987, SPX corrected down to its 100dma three times before finding a base as 30s corrected off a local peak. SPX went on to rally to new highs into late August alongside 30s moving back to the local highs, but the rally exhausted itself as 30s broke to new highs. Even as 30s made new highs, SPX still held its 100dma for the month of September, two times, before finally breaking lower in earnest as 30s reaccelerated higher once and for all.
Given the fact we are in a “window of strength”, it’s critical to keep in mind the likelihood SPX finds an interim floor here soon despite the medium-term bearishness of 30s accelerating higher. If the 1987 analogue is prescient, the 4240 100dma should provide strong support. But first things first, let’s get down to the 50dma circa 4400 ahead of next week’s August 10 CPI report and reassess.