SPDR S&P 500 ETF Trust (SPY) Forecast: Bond yields continue to hinder any rally hopes

Equities remain under pressure on Tuesday as bond yields rise globally. This naturally puts pressure on valuations, and already we are seeing European and Asian markets continue the trend lower. With the benchmark US 10-year yield fast approaching 4%, it will be difficult for equities to rally. 

SPY news

As we approach one of the more important data releases of the month, we will likely see some position squaring. Last week we witnessed a sharp sell-off early in the week before a modest rally as we approached Friday's employment report. A strong showing ended any pivot hopes, and equities once again plunged. That has continued this week with the sell-off likely to continue on Tuesday. All eyes are on bond markets and bond market volatility. The Bank of England is once again stepping into its bond markets to try and calm the situation, but yields overall remain higher. As we approach Thursday's CPI though, we expect a stabilization and perhaps a slight rally in risk assets. The CPI will then be key. Another high number, and stocks will again plunge. 

However, hopes and signs are there for a risk asset rally. As we pointed out in our week ahead preview (see here Week Ahead on Wall Street (SPY) (QQQ): Earnings season begins and CPI data the highlight), sentiment and positioning are massively skewed to the downside. Any rally will call some short covering from hedge funds and CTA trend -ollowing systems having to chase any rally. Added to that, we have seasonal factors in favor of a recovery in stocks. October is historically a positive month, and in a midterm election cycle it is even more skewed to the upside.

The potential is there, but the caveat is Thursday's CPI. Will we finally see some cooling in inflationary pressure and the Fed pivot talk again increasing? On Friday we also begin earnings season. The bar has been set low in terms of expectations. We are all aware of how bad retailers were last time out. We have had FedEx (FDX) and Nike (NKE) release poor guidance, so again we feel the skew is tilted higher. This is a risk-reward outcome, not a recommendation. 

SPY forecast

We approach the key 200-week moving average. Last time out the SPY bounced from the level, so it remains key. Just below we get strong support at $352 from the Fibonacci retracement of the March 2020 low to high. That is key support. $373 remains our key pivot. A break higher and a swift move to $388 cannot be ruled out.

SPY daily chart