Still Rising Fed Balance Sheet Supports A Rally In Yields And In Equities For A Few Days Longer

Original article here. 

 

There is evidence that the still rising Fed's Balance Sheet will continue to support BOTH a rise in equities and yields for a few days longer.

 

Since Asian trading today, Wednesday, March 3, 2020, equities have been rising along with yields. That's just an 8 hour period, so it is not very definitive. But we have to start looking at the possibility that the positive covariance between equities and yields returns soon. But what may realistically happen, is that when yields are not rising (or are falling) equities will rally higher; and vice versa. But the general trend for both equities and yields could be higher for a week longer.

 

The historical seasonality for Fed's Balance Sheet outflows kicks in a few days from now (see chart below). The model for the current, 2020-2021 SOMA Transactions (thick blue line in charts below) as well as historical seasonality, have already rolled over, and will be a negative factor for both equities and yields until third week of March. Yields should we lower, and equities could be lower as well during this period.

 

Decomposition of Liquidity Flows (Fed's Balance Sheet) and 2020-2021 SPX (Jan 1, 2020 to Apr 30, 2021)

 

Watch the behavior of the SPX Decomposition Profile -- which provides the linkage to the liquidity flows

 

 

In addition to these factors, our current 2020-2021 Fed Balance Sheet model, which is ahead of the actual data for a week, is already showing a peak, in line with its historical seasonality (thick blue line in the charts above and below).

 

Decomposition of Liquidity Flows (Fed's Balance Sheet) and 2020-2021 10Yr Yield (Jan 1, 2021 to Apr 30, 2021)

 

Watch the behavior of the Yield's Decomposition Profile -- which provides the linkage to the liquidity flows

 

 

Key take-aways:

 

(1) Both yields and equities could rise TOGETHER for a few days prior to the start of the seasonal outflows in the Fed's Balance Sheet; and

 

(2) From that peak in yields, and equities, both could fall or go sideways until the third week of March (at least).

 

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Here is the current status of the PAM flagship Swing Fund, which includes open and closed trades.

During the twelve months of 2020, PAM delivered phenomenal real-dollar Hedge Fund trading performance, the best at Seeking Alpha:

PAM's flagship Swing Portfolio, year-to-date (December 31, 2020) delivered $100, 181,522.77 net profit on $11,172,813 margin capital.

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January 2021 spreadsheet here:

Year to date 2020 spreadsheet here.

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