If Inflation Is Only ‘Transitory,’ Then Positioning Is Going The Wong Way

Peak Stimulus?

Buy the rumor—sell the stimulus checks?

Stocks and commodities lurched higher, and the USD tumbled when Fed Chair Jerome Powell made it clear that the Fed would remain ; 24 hours later, stocks and commodities were lower, the was higher.

Last week may have been a MAJOR TURN week.

S&P 500 Emini Daily Chart

S&P 500 Emini Daily Chart

Was That As Good As It Gets?

We’ve had massive equity inflows, stimulus checks, a super-easy Fed, a vaccine rollout going gang-busters, surging inflation expectations, a red-hot housing market; what could go wrong?

This chart shows 2021 equity flows annualized; as if the flows were sustained all year at the YTD pace.

Inflows To Stocks

Inflows To Stocks

People believe that stocks only go up; that inflation will surge higher. Nobody actually comes out and says it, but the crowd likes to think that the Fed is either stupid or lying when they claim that increases in inflation will be “transitory.” If inflation is “transitory” the crowd is heavily positioned the wrong way.

Equity Allocation To U.S Household Sector

Equity Allocation To U.S Household Sector

U.S Inflation Expectation

U.S Inflation Expectation

People want to believe that US President Joseph Biden is just getting started as far as stimulus programs are concerned. Maybe, maybe not. The Big Green Infrastructure Program may never get through Congress.

Here’s a long-term chart of the index. I’ve seen this chart pattern many times before, and while I understand the market can easily keep going up, I worry that we may be near the high point of the 2nd chart.

S&P Semi-Annual Chart
S&P 500 March Cycle Chart

S&P 500 March Cycle Chart

The yield on the 10-year Treasury bond jumped from ~0.5% last August to ~1.75% last week. A new generation of Bond Market Vigilantes has been testing the Fed. The  Treasury yield is now greater than the S&P 500 dividend yield for the first time in over a year.

10-Year Treasury Bond Yield Chart

10-Year Treasury Bond Yield Chart

Bonds have fallen so fast that it makes me think they have been getting hit with “Get Me Out” orders. Bonds are now extremely oversold, and if (for some reason) stocks and commodities start falling, bonds could jump.

10-Year Treasury Notes Weekly Chart

10-Year Treasury Notes Weekly Chart

rallied to a 28 month high near $68 last week (a double from November) but got hit hard with wave after wave of selling on Thursday. Perhaps there was a psychological connection between the waves of selling in stocks, bonds and crude!

Crude Light Oil Daily Chart

Crude Light Oil Daily Chart

Fossil fuel energy was the DOG of the market last year—it has been the DARLING of the market this year-to-date. (Early last week I sent Martin Murenbeeld this chart and asked if he thought it was a good time to buy and sell crude; it looks tempting to me!)

Cross-Assets Returns YTD

Cross-Assets Returns YTD

The  hit a 4-year low around 68 cents during the panic last March but has rallied (with the other commodity currencies) ever since and touched a 3-year high of ~80.90 cents following the easier-than-expected Fed announcement. The CAD sold off Thursday as stocks, bonds and commodities fell, creating a classic Daily Key Reversal on the charts.

CAD Daily Chart

Gold has quietly rallied ~$75 from last week’s 10-month low. If has a Ph.D. in economics, gold has a Ph.D. in market psychology—and often moves before other markets. Gold has been “ignored” by the crowd lately while they have been busy buying other things on the reflation/inflation story. Last week I wrote that gold would rally on “uncertainty,” which is a polite word for fear.

Gold Daily Chart

My Short Term Trading

Last week I that my “bias” or my “Big Picture View” is that stock indices (and many other markets) have been pushed to preposterous levels by excessive speculation and are at risk of nasty corrections. I also explained that my “bias” was out-of-sync with current price action—that it’s hard to make money shorting a bull market!

Loans On SPY

Loans On SPY

I started last week with a clean slate, looking for opportunities to trade in line with my “bias.” I sold CAD short with a tight stop last Monday when it appeared to be making a double top near 80 cents. I was stopped for a small loss. I sold it again Thursday when it reversed from a 3-year high. I remain short.

I sold short a couple of times early in the week for small gains and sold it again Thursday when stocks, bonds, and commodities tumbled. I remain short.

Russell 2000 Daily Chart

I bought gold Monday (I liked the way it rallied back from the lows the previous Friday) and sold it for a $15 gain Wednesday when it rallied on the Fed announcement.

I think Bullish Enthusiasm may have peaked this week. I’ll be going through my charts looking for possible setups to short stocks and commodities while buying the USD. If market psychology gets jittery this week I will also look to buy bonds and gold.

This chart shows Hedge Funds holding record-sized long positions in commodity futures. is a commodity index.

Commodities Index Chart

Commodities Index Chart

This site uses cookies to offer you a better browsing experience. By browsing this website, you agree to our use of cookies.