S&P ‘Not Yet Oversold’ Say These Lines

So, something possibly important you should note about this week (in case it wasn’t obvious) is that equities are now taking their cues from the ongoing bond rout.

That seems like a flippant observation, but bear (get it?) in mind that this comes during  earnings season, and also at a time in the cycle that should ostensibly be good for stock-pickers – or at least according to Goldman. Recall this from a note out two weeks ago:

We find that stock-picking opportunities are highest when equities are in the Growth phase of the equity cycle and when the economic cycle extends. This is because in this phase returns are driven by actual earnings growth rather than by expectations of a recovery or a deterioration in the cycle. In these parts of the business and equity cycle, pairwise correlations tend to be the lowest (Exhibit 5) and the source of dispersion more micro-driven (Exhibit 6). When the economic backdrop improves and sentiment is ‘risk on’, company fundamentals tend to be at play, as the influence from macro drivers of sector performance (e.g., bond yields) fades.

So much for that last bolded bit. Since Goldman wrote that, the bond selloff has gotten materially worse and as a consequence, the direction of equities going forward will likely be determined by yields and the dollar. Or at least that what it looks like from where I’m sitting because now, the bond selloff is all anyone wants to talk about and if you look at the price action after the Fed statement on Wednesday, what you saw was equities fading notably as 10Y yields touched 2.75. Ultimately, yields faded into the close, but it looks like stocks are pretty sensitive to that right now.

Anyway, for whatever lines are worth, BofAML’s technical analyst Stephen Suttmeier thinks we are not yet oversold. To wit:

SPX: Tactical pattern bearish while below 2837-2852 gap. The S&P 500 gapped down on Tuesday. The immediate pattern is bearish while below the downside gap at 2837-2852 with deeper risk to 2807-2798 (chart and projected uptrend support). This is a best case scenario with a path to 2900+ if the 2800 area holds. But since we are not tactically oversold, we cannot rule out a deeper dip to 2770- 2767 (1/12/18 upside gap) and 2696-2673 (late-December bull flag pattern). It would take a decisive move back above the 2837-2852 downside gap to refresh the bulls.

He also notes that “better rallies for the S&P 500 over the last two years began when the VXV/VIX was oversold or near oversold” and currently, “VXV/VIX is trending lower off recent overbought readings and is not yet oversold” either:

So there you go. A lines-based rationale for staying bearish.