What's needed for stocks to rally is capitulation, but that could come from unexpected sources, strategist says

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A rally can begin without a surge in the Vix or a financial blowup somewhere.

It’s the end of what felt like another very choppy week in stocks. And yet the S&P 500 SPX is in line to start the final session only about 1% or so below last Friday’s close.

But a 10-year Treasury yield TMUBMUSD10Y surging to 4.25% for the first time since the great financial crisis is a looming reminder that to do so would be fighting the Fed. “But this is not the only ‘capitulation’ that could lay ahead,” he argues in his latest note. “There are other forms of ‘capitulations’ that could similarly boost investor confidence, in turn, fueling a firm footing for equities.”

How about the tight labor market finally capitulating, says Lee, with falling job openings and less wage growth pressures . Markets Benchmark 10-year Treasury yields TMUBMUSD10Y rose 4.3 basis points to 4.276%, their highest since 2008, as investors priced in stubborn inflation and more Federal Reserve rate hikes. The move up in yields hit S&P 500 futures ES00 , down 0.7% to 3650 and lifted the dollar index DXY , up 0.6% to 113.51. Worries about slowing demand pushed WTI crude futures CL.1 down 0.3% to $84.25 a barrel.

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