Discussion
On November 27 we said via private Xwitter:
“I cannot overemphasize enough how important break-evens are to FED messaging. The BE curve has moved sharply lower, most notably 5y5ys.
“The Fed will be dovish this week.”
We have continued to hammer this point ad nauseam since then, stating in the December 21 WOTE Report that rising break-evens would impair the equity market’s ability to move materially north of ATHs. Well, here we are, and break-evens are not just rising across the curve but the critical 5y5y portion of the curve is going vertical.
With NYSE 50dma breadth rapidly deteriorating in a bearishly divergent manner, at minimum SPX is headed for 4500 in the coming weeks and perhaps lower if breadth deteriorates further. Today’s levitation in SPOOZ and Qs comes yet again on weak breadth, and IG CDX is not confirming the advance down just -50 bps on a day where equities are up 100 bps and failing to break to new lows.
The Yellen/Brainard put that sits beneath the market is powerful and will limit ultimate downside. But these types of heavily bearish divergences just as the window of strength slams shut very rarely correct themselves by catching up to the upside.
Make no mistake, market makers are unloading bags to FOMO equity chasers right here and now.