Morgan Stanley: The S&P 500 technicals take center stage in a bearish backdrop
Adam Gault
The average stock is roughly flat year-to-date in the S&P 500 (NYSEARCA:SPY), aside from a handful of mega-cap tech leaders, according to Morgan Stanley.
Seven to 10 stocks hold the vast majority of the returns for the S&P 500 (SPY) market cap-weighted index year-to-date, including Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA).
But more than 60% of the S&P 500 is below the 200-day moving average, which is reflective of a weaker breadth backdrop, according to the brokerageâs U.S. Equity Strategy report, published on Monday. The percentage of stocks above the 200-day moving average over time is at 37%, suggesting a downside in index price.
In addition, MS believes that AI will be a great driver of growth and productivity for the overall economy âonce this technology is deployed more broadly,â but they also warned that "investors must be cognizant of the longer time frames for enterprise technology adoption". 
âIt's prudent to not look through the valley of shorter-term cyclical growth risk still in front of us before the next cycle/durable bull market can begin in earnest,â MS strategists continued. âHence, our technical view that the move in the S&P 500 from May to July represents a false breakout above the trendline resistance.â
In a bear steepening backdrop, parts of real estate investment trusts, banks, capital goods, and tech hardware tend to outperform; cyclicals and value tend to outperform from a factor standpoint.
In addition, six out of 11 S&P 500 (SPY) sectors are down year-to-date, with Energy as the medium sector down 2%.
Investors are focused on the 200-day moving average from a technical perspective.
âWhile the current futures contract broke the 200-day and then was unable to get back above it until Friday's rally, the cash index and rolling futures contract never got there,â MS strategists said. âIt's no small coincidence that these levels many were focused on also coincided with the uptrends from October, which only further supported the call/view that a move higher off these levels would present the buying opportunity many were expecting.â
When there is high uncertainty in the market, investors tend to look at the price and technical to guide their decisions, MS strategists said, but when the S&P 500 (SPY) tried to defend key technical support last week, it broke down âin a matter thatâs reflective of our fundamental outlook.â
That is, the lack of a long-term resilient governmental policy response and structure that supports fiscal discipline, which in turn would have implications in the bond and equity markets.
Because the U.S. Treasury is issuing almost $2T in bonds, the market is demanding a higher rate of return to fund that issuance, but the Treasury market continues to trade poorly with 10-year yields (US10Y) close to 5%.
The strong overseas buyer demand has reduced, and with the Fed no longer doing quantitative easing and shrinking its balance sheet, âitâs unclear who the natural buyer of this significant new supply is.â

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