Where we are: S&P 500 futures are hovering around 5305 this morning, slightly below Friday’s New York close, digesting last week’s gains. The overnight range has been relatively tight, between 5300 and 5310, with little conviction on either side. Key support remains around the 5300 level, while resistance is forming near 5320.
What’s driving it: The market’s narrow leadership, particularly its reliance on AI-related stocks, is making the S&P 500 increasingly vulnerable. The broad market, excluding AI infrastructure, is reportedly showing zero growth, raising concerns about the sustainability of the current rally. Rising real yields, now at 2.18% on the 10Y TIPS, continue to present a headwind, particularly for growth names. While a potential agreement between the US and Iran, easing Strait of Hormuz concerns, offered some initial support, the lack of concrete progress is capping gains.
- The 10Y real yield at 2.18% is putting pressure on equities, particularly high-multiple growth stocks.
- Speculator positioning in S&P 500 futures remains modestly short, but not excessively so, with net non-commercial contracts at -134,906. This leaves room for further short covering if the market rallies, but also exposes the index to downside risk if sentiment turns.
- The 2s10s spread compressed another 6bp on Friday to 0.43%, suggesting that investors remain cautious about the economic outlook despite the recent risk-on sentiment.
NY session focus: With US markets closed today for a public holiday, expect subdued trading activity. The focus will remain on digesting Friday’s yield moves and any further headlines regarding Middle East peace negotiations. Keep an eye on the 5300 level – a break below could trigger further selling. The trade that’s been working is fading rallies, but that’s at risk if a genuine positive catalyst emerges. The pain trade for the S&P 500 is a sustained breakout above 5320, forcing shorts to cover.