Don't expect the S&P 500 to make much progress with rates this high

Published Tue, Sep 6 20221:10 PM EDTUpdated Tue, Sep 6 20221:26 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. An oversold U.S. market is trying to come to grips with three days of challenging but not wholly surprising macro headlines, leaving the indexes whippy around the 3,900 level of the S & P 500 . European energy scarcity/runaway power costs are mostly manifest in depleted global-growth expectations and an unrelenting (so far) surge in the dollar. But oil/gas prices are sort of selling the news and the macro message does little to undermine the idea of relative U.S. economic resilience set by Friday's jobs numbers and today's ISM services gauge. The key short-term task for the tape is to respond to some significant oversold conditions (very low percentage of stocks above a 10-day average, etc.) after three straight down weeks and a 1.5% afternoon drop on Friday. The S & P 500 has spent very little time under 3,900 (or over 4,200) the past four months, with the dive toward 3,600 representing peak stagflation panic and the ramp to 4,300 into mid-August animated by a powerful oversold rally and some "Federal Reserve pivot" expectations taking hold. The "don't overthink it" take on the market remains a cautious one: Stocks are in a well-defined downtrend. They failed exactly at the declining 200-day average. The Fed is tightening into a slowdown (or worse) and might go until something ruptures. The European Central Bank is hiking into a recession. September is historically ungenerous. Further, if you think Fed balance sheet reduction is a real-world threat (vs. my take that it's largely irrelevant), it accelerates this month. Against this, we have a market that already — at the lows — has undergone the typical damage of a nonrecessionary or mild-recession bear market. Valuations have returned toward roughly neutral levels. Only housing is unequivocally in contraction mode. We saw some pretty encouraging/reliable breadth/momentum signals fire off the June lows and sentiment/positioning remain quite pessimistic/defensive. Treasury yields are still rising and restraining equity risk sentiment: The 2-year note is back up to 3.5% and the 10-year near 3.34%. Stocks haven't been able to make much progress in years with a 3%+ 10-year: It rose back above there in mid-August as S & P rolled over. Not an ironclad relationship, but with fragile growth and a strident-sounding Fed this will restrain valuations all else equal. The consumer price index release next week will come when the Fed is in a speaker blackout period, so the market will have to sort out whether it tilts the September hike toward 50 or 75 basis points (or other). I still think eit