But this might also have been a Fed forced 10Y Treasuries buying move.
But even with that move, the 10Y rates did not ease down.
This means that the $SPX is now sitting at its 10Y Yield induced price ceiling of $3840.
Let's look again at the comparative rates issue. We all know that there are many type of investors:
Income based investors (pension funds for example) will usually compare the 10Y yields to the S&P500 dividends yields. When the S&P500 offer better dividends returns, then they would switch back to the bonds investing. Of course, the S&P500 dividends Yields are very short-term compared to the fixed US Treasuries income.
We can see below that the 10Y Yields look more interesting compared to the S&P500 Dividends yields. Hence, Pension funds would naturally move back into Treasuries.
Other investors (most probably index followers who buy the SPY ETF) will look at the S&P500 earnings yield compared to the 10Y Yields. With the Covid situation, S&P500 earnings have not been supporting the recent price surge. This price surge is more an anticipation move to the coming $1.9T stimulus bill which is supposed to boost companies earnings, but also inflation expectations.
The Earnings yield of the above Figure is the 12 months rolling PAST earnings yields. This yield is now at 2.56%. However, if the price looks 6 months ahead, we should maybe also take the forward S&P yield, which is about at 2.92% for the December 21 Quarter (9 months ahead.)
This Figure would push the price ceiling to $4380. But unfortunately, the 10Y High Quality bond prices that are used in the above Figure are the Fed published prices, which are conservative.
We can see below that Moody already shows the HQ average corporate Yields on the secondary market moving to 3%.
Moody also displays the 10Y HQ bond vs 10Y Treasury yield spread at 1.46%. On the above Figure, I use a much smaller 1% spread. Using the 1.46% spread level combined to the 2.92% forward looking earnings yield would also display a very similar price ceiling of $3840
Conclusions:
However we look at the current S&P500 price, it is at a top, whether we look backward or forward.
Of course, I did not mention other type of investors: central banks for example (The BOJ still buys US ETFs) or private momentum players.
High rates are a natural equity killer, but momentum induced by the coming liquidity wave could force prices into overbought territory.
Hence, we should expect a sharp increase in short term volatility. Selling volatility will be profitable in the coming days/weeks/months.
