OVERVIEW
Morning Update

• Thursday: SPY gained 1.13% and QQQ 1.73%, while MDY and IWM also finished higher. Nine of 11 sectors advanced, led by Technology, which gained 2.25%.

• SPY: Closed at 762.60, roughly 0.4% above its 50 day average. Thursday’s move came on 1.26x average volume, giving the reclaim more weight than a quiet bounce.

• QQQ: Closed at 716.92, around 1% above its 50 day average. Large-cap technology continues to recover faster than the broader Nasdaq universe.

• MDY and IWM: Both bounced Thursday but remain more than 3% below their 50 day averages. The lower-cap part of the market has stabilised, but it has not repaired.

• Oil: Brent is down for a third session at roughly $103.17, while WTI is around $101.30. Saudi supply concerns have eased as more crude moves through Oman and repairs progress on the East-West pipeline.

• Rates: The 10 year Treasury yield has eased to roughly 4.96%, after moving above 5% earlier this week. Thursday’s combination of lower oil and lower yields helped the equity rebound.

• Bank of Japan: The BOJ raised rates 25 basis points to 1.25%, the highest level in 31 years. The decision passed 7 to 2, but the yen weakened as investors focused on the two dissents and relatively cautious guidance.

• Fed: Wednesday’s hike remains part of the backdrop rather than a fresh catalyst today. Sixteen of 18 policymakers expect at least one more increase this year, while markets remain roughly divided on whether the next move arrives in October.

• Today: Fed Governor Christopher Waller speaks on the economic outlook at 8:30 a.m. ET, followed by Industrial Production and Capacity Utilization at 9:15 a.m. ET.

MARKET ANALYSIS
The Market Needed The Bounce

The market finally put together a stronger session on Thursday as two of the main pressures from earlier in the week eased.

Oil fell for a second straight day and the 10 year Treasury yield moved back below 5%, giving equities some relief after a month in which those two markets repeatedly moved in the wrong direction together.

The S&P 500 recovered strongly and is now only around 2% below its August record high. Reuters described Thursday’s move as a combination of short covering, profit taking in defensive positions and relief after the Fed event passed without a larger surprise.

The breadth was also much healthier than it had been earlier in the week.

Nine of the 11 sector ETFs in our basket finished higher. Technology led with a 2.25% gain, while Consumer Discretionary and several cyclical groups participated as well.

That is an important improvement from the sessions where SPY or QQQ were holding up while most sectors underneath them were falling.

We would still separate a one-day improvement from a complete market repair. MDY and IWM remain far below their medium-term averages, and equal weight continues to lag the cap-weighted technology indexes.

SPY Is Back Above Its 50 Day

SPY closed Thursday at 762.60, putting it around 0.4% above its 50 day average.

Thursday’s relative volume was 1.26 times the 20 day average, which makes the move more convincing than some of the lower-volume rebounds we saw during August.

That reclaim is the most useful change in the S&P chart. The ETF had spent several sessions moving around the 50 day before finally closing more clearly beneath it following the Fed decision. Thursday reversed that move quickly.

We would now like to see the index hold above the moving average rather than immediately drop back through it.

The next larger area overhead is around 775, followed by the August highs in the upper 770s.

Those levels can wait and for current positioning, the first priority is simply keeping price above the reclaimed trend line and allowing the rest of the market to catch up.

A close back under the 50 day would make Thursday’s bounce much less useful. Continued trading above it would give SPY room to rebuild toward the highs.

QQQ Recovered More Convincingly

QQQ closed at 716.92, roughly 1% above its 50 day average and the ETF gained 1.73% on Thursday with relative volume of 1.21x, so both price and turnover improved.

That is a stronger technical response than we saw in SPY and the Nasdaq 100 has spent much of the past month repeatedly moving above and below the 50 day, and Thursday gave it some breathing room again.

The next obvious area sits around 724, with the larger August resistance zone still above that.

Equal weight remains the caveat as the QQQE is still roughly 1.9% below its own 50 day average, which tells us the average Nasdaq 100 constituent has not recovered as quickly as cap-weighted QQQ.

We would not use that difference alone to conclude that only a handful of mega caps are driving the rally. Thursday’s broad sector participation argues against making such a narrow claim.

It does show that large technology companies currently have the healthier price structure.

That has been fairly consistent through the recent volatility. AI infrastructure demand remains strong and investors have continued to return to the largest semiconductor, cloud and data centre companies whenever macro pressure eases.

Mid Caps Still Have a Lot of Ground to Recover

MDY closed at 669.43 on Thursday and the bounce helped, but the ETF remains roughly 3.3% below its 50 day average.

That gap is large enough that we would not describe mid caps as repaired simply because Thursday was positive and the first useful area is around 683, followed by the 50 day above that.

Nearby support remains around 660 and the MDY traded at 1.24x average volume Thursday, which tells us buyers were willing to participate in the rebound. That is encouraging after a period where mid-cap rallies often arrived on relatively quiet turnover.

The next step is translating that participation into several stronger closes.

Until then, we continue to treat mid caps as a weaker area of the market rather than a source of leadership.

Small Caps Are in Much the Same Position

IWM closed Thursday at 285.43, also more than 3% below its 50 day average.

The ETF bounced but remains well beneath the mid-290s area where its moving average currently sits.

Thursday’s relative volume was around 1.12x, which is enough to show some real buying without suggesting the character of the small-cap tape has completely changed.

There is support around 281, while a move back through roughly 291 to 292 would begin to improve the short-term structure.

The bigger repair still requires a return toward the 50 day and the small caps remain particularly exposed to financing costs because many of the underlying companies rely more heavily on floating-rate debt and domestic credit conditions than the large multinational businesses dominating SPY and QQQ.

That becomes more important in a world where the Fed has started raising rates again and the 10 year is still close to 5%. We are therefore happy to let IWM prove itself before adding much exposure there.

Oil Has Fallen for Three Straight Sessions

Brent is down around 1.6% to $103.17, with WTI near $101.30. That puts crude on course for its first weekly decline in three weeks.

The supply situation has not returned to normal with only four commodity vessels passing through the Strait of Hormuz on Thursday, compared with a recent ten-day average of around 16. The conflict across the Gulf and Red Sea also remains active.

The immediate Saudi problem has become less severe as Saudi Arabia is loading more crude through Oman, repairs are progressing on the East-West pipeline and inventories of refined products have increased across several regions. China also increased refined-product exports by 12.7% year on year in August, with jet-fuel exports reaching a record.

That extra supply has been enough to pull some of the geopolitical premium out of crude.

We would still be careful about treating $103 Brent as cheap or benign. It remains high enough to keep inflation pressure elevated, particularly when diesel and other refined products are still extremely expensive.

U.S. diesel prices have moved above $6 per gallon, with the shortage increasingly tied to damaged refining capacity rather than a simple lack of crude.

That means the recent fall in crude should help inflation at the margin without making the broader energy problem disappear.

The 10 Year Has Backed Away From 5%

The U.S. 10 year yield is around 4.96%, down from the levels above 5% reached around the Fed meeting.

Thursday’s move was helpful for equities as we saw long-dated Treasury yields fell while oil moved lower, reversing the combination that had been weighing heavily on stocks through the first half of September.

The Fed remains hawkis and Wednesday’s quarter-point increase took the target range to 3.75% to 4.00%, and most policymakers expect another hike before year-end.

Markets were pricing roughly even odds of another move in October by Thursday evening, so we would not describe the bond rally as evidence that the tightening cycle is finished.

The market seems more comfortable that the Fed is taking inflation seriously, while lower oil has removed some of the urgency from long-term inflation expectations.

That is a better backdrop for equities than 5% yields and $109 oil, even if neither problem has gone away.

Japan Joins the Tightening Cycle

The Bank of Japan raised its policy rate from 1.00% to 1.25% overnight, the highest level in 31 years.

The move was widely expected but notable because it came only three months after the BOJ’s previous hike. Japan had previously been moving at a much slower pace.

Two board members voted against the increase, however, and Governor Kazuo Ueda stopped short of giving markets especially aggressive guidance about what comes next.

The yen weakened after the decision rather than strengthening. The broader point is that the Fed is not tightening alone.

The ECB has also moved rates higher, the Bank of England is signalling that future increases may be necessary, and markets expect further tightening in Japan.

That keeps global financial conditions restrictive even if U.S. long-term yields have eased over the past two sessions.

We do not see the BOJ decision as a direct reason to change U.S. equity exposure today. It is useful context for why we remain reluctant to assume that lower Treasury yields over two sessions mark the start of a sustained easing move.

Waller and Industrial Production Before the Weekend

Fed Governor Christopher Waller is scheduled to speak on the economic outlook at 8:30 a.m. ET. Industrial Production and Capacity Utilization follow at 9:15 a.m. ET. Both timings are confirmed by the Federal Reserve calendar.

Industrial production is unlikely to dominate the market in the way CPI or the Fed decision did over the past week, but it will give us another read on the strength of the underlying economy.

That has become relevant because the Fed is tightening into an economy that still looks reasonably resilient.

The Atlanta Fed’s GDPNow estimate currently points to roughly 5.1% annualised growth in the third quarter, according to Reuters.

Strong growth makes it easier for the Fed to remain focused on inflation without worrying immediately about tipping the economy into recession.

Waller’s comments could be more important if he gives any indication of how he views the path beyond Wednesday’s hike.

With Warsh deliberately avoiding detailed forward guidance, markets will pay more attention to other FOMC members for clues about whether October is genuinely live.