A split market has formed over the past six weeks. Rising yields have pushed market breadth on the S&P 500 (SPX) sharply lower. Money is chasing relative safety, and it is flowing into tech. The Nasdaq Composite (COMP) hit a new high last week. The S&P 500 (SPX) market-cap weight is holding well, keeping the 7600 level. The semiconductors (SOX) and Nasdaq 100 (NDX) show healthy technicals.
The other side looks weak. The S&P equal weight (RSP) and the Russell 2000 (RUT) sit near trouble. The Russell 2000 (RUT) is almost down at its 200-day simple moving average. This reflects money moving toward names that interest rates will not hit as hard. There have been negative cuts to EPS estimates in real estate and other rate-sensitive sectors. Market breadth on the S&P 500 (SPX) is back at levels last seen in March when the war was announced. S&P market cap, tech, and semiconductors look good. Elsewhere, healing needs to be done.
Yields and rates
The 30-year fixed mortgage rate hit 7.30% this morning, the highest since November 2023. Mortgage applications fell 6% last week. After a cooler-than-expected PCE print and a healthy upward revision to GDP, the 10-year yield still rose instead of falling. Chicago PMI came in better than expected. Buyers are not stepping in on the PCE report, so yields stay high. The curve steepened after the data, with a rally on the front end. The 2-year fell about three basis points. The 30-year barely moved and sits at levels not seen since 2002.
Quarter-end volatility
The SPX reclaimed 7700, helped by the cooler PCE and the GDP revision. Quarter-end and month-end bring rebalancing pressure. Morgan Stanley (MS) sees roughly $38 billion in equity supply from pension rebalancing, which could drive volatility into the closing bell. The first part of October often brings a volatility event. As October reaches its midpoint, big banks report earnings, and positioning ahead of what looks like a strong earnings season could add more up-and-down moves. Over the next week or so, volatility may come back to life in response to yields that remain high.
What decides direction
The path of yields and oil prices matters most. If WTI crude can stay around the low 90s until the midterms, the bulls have no problem. The trouble is the 10-year and 30-year making new cycle highs almost every day. That makes it hard for sidelined money to come in and prepare for earnings when there is no sign of buyers stepping up.
The Russell 2000 (RUT) shows several bearish technical signals: a MACD cross with the fast line dropping below the slow line in mid-August, and a break of the 50-day SMA. The Russell 2000 (RUT) and the S&P equal weight (RSP) hit a fresh three-month low, and both are in downtrends. This tracks the rise in yields, since the correlation is clear. Bears argue that weak breadth under the surface hides trouble across the parts of the economy that are not AI. To turn bullish, you want yields to stabilize, buyers to step in, and bullish reversal patterns to form on the charts of the S&P equal weight (RSP) and the Russell 2000 (RUT). While these stay in a downtrend, stepping in is risky. The pattern feeds itself: rates rise, money leaves rate-sensitive names and moves back into AI, where EPS growth rates look most stable.
Large-cap names have firmly reestablished leadership. The next big test is Micron (MU) reporting this afternoon.
