A Major Shift May Be Heading To Markets This Week

The market pulled back a little again this week, but I wouldn’t call it a big pullback. The S&P 500 still hasn’t broken below its range, and we remain stuck in the same range we have been in since early June. A double top is possible, but it’s not confirmed yet. We would need to break below the mid-October low before we can talk about lower prices. The Nasdaq closed right on support, and a break below that level would open the door to a further decline.

What stands out is the rotation taking place beneath the surface. The S&P 500 is flat, while the equal-weight RSP has rebounded nicely over the last couple of weeks, mostly because health care and financials are doing better as rates have come down, while semis and technology are struggling. The pattern in the SPY-to-RSP ratio suggests equal weight should keep outperforming, and if that ratio breaks lower, I think semis and technology will keep underperforming, since those were the sectors that drove the separation in the first place.

Rates fell hard this week, and Thursday’s move looked exaggerated to me. It looked like a flight from parts of Europe to safety. The Italian-German 10-year spread widened considerably, and US high-yield spreads are moving right along with it, so credit spreads are starting to widen globally. I think that had a lot to do with Thursday.

This week brings the UK budget on Wednesday and a Bank of Japan meeting, both of which matter for global rates. I could see the US 10-year and 30-year pulling back a bit more, but not as far as everyone expects, and longer term I think rates are still trending higher. That supports the dollar, which looks positioned to go higher, and oil, where Brent has broken out of a meaningful consolidation, and I would be surprised if it stopped here. All of that argues for gold to keep struggling after closing just below 4,000.

Add heavy Treasury bill issuance between now and the end of November, and there are plenty of reasons to be cautious. The S&P 500 hasn’t done anything since June 2, and I think it has a challenging road to a new high. More likely we keep grinding, and the market starts to give back once earnings season passes and the dispersion trade unwinds.