The recent rate surge has upset the picture for growth stocks and, consequently, the S&P 500 is going through a consolidation phase. While we cannot say precisely how deep this pullback will be or if the lows are already in, ongoing positive market dynamics tell us the pullback is likely to be contained and therefore should be viewed as a buying opportunity. With that said, a break below 3789 would signal additional downside ahead.
- S&P 500. As noted in last week’s Compass, a break of 3870 on the S&P 500 signaled a loss of upside momentum and a false breakout, meaning additional downside was likely. Thus far, the downside has been short-lived, with the S&P 500 quickly reclaiming the 3870 level while forming a bull flag pattern. The bull flag breakout level of 3915-3925 is current resistance to watch; a break above this level would likely mean a test of the all-time highs and beyond. For this to happen we need 3860 short-term support to hold; if this level fails to hold, the next important support comes in at 3789-3805 and the 50-day moving average, followed by 3694, 3635, 3588, and 3550… see chart below.
- Treasury Yields, Value vs. Growth. In the near-term we are watching 2.4% on the 30-year Treasury yield and 1.61% on the 10-year yield. We need to see some stabilization in interest rates, ideally below these levels, in order for growth stocks and the major averages to find some support. It is possible that this stabilization started on Friday of last week. Additionally, large-cap value appears to be overtaking growth as leadership as evidenced by the Russell 1000 value vs. growth ratio… see chart below
Chart Source: Factset
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