Stock ATHs And Gold Double Bottom

Bullish run in stocks that lost steam before the close – does that qualify as a reversal? Given the other moves such as in the Dow Industrials, Russell 2000, and emerging markets, it‘s unlikely that the S&P 500 met more than a temporary setback. Just look at the rush into risk-on assets as an immediate reaction to the infrastructure and taxation plans – see the high yield corporate bonds moving higher (and this time also investment-grade corporate bonds finally) as long-dated Treasuries keep losing ground, and the dollar noticeably wavered.

Yes, emerging worries about how this will be all paid for – not that an ideological challenge to modern monetary theory would be gaining any traction, but rather what would be the (quite predictable) effect of steep tax increases? Reduction in economic activity, unproductive moves to outset the effects, decrease in potential GDP? Remember the time-proven truth that whatever the percentage rate, the government always takes in less than 20% GDP in taxes. The only question is the degree of distortions that the tax rate spawns.

So, the S&P 500 upswing has good prospects of proceeding unimpeded as:

(…) Stocks seem immune to the rising yields spell at the moment, meaning that value trades can remain at elevated levels while technology is stuck in no man‘s land and defensives are consolidating recent sharp gains (consolidating until the rising yields come back with vengeance).

And there is little reason given the Fed‘s stance why they shouldn‘t. Much of the marketplace is buying into the transitory inflation story, and inflation expectations aren‘t yet running too hot. As the economic growth is stronger than current or future inflation, we‘re still at a good stage in the inflation cycle – everyone benefits and no one pays.

Neither the 10-year Treasury yield nor inflation expectations as measured by TIP:TLT ratio or RINF, are signalling trouble for the stock market. It‘s only commodities ($CRB) that have been consolidating through March – but that‘s of little consequence if you switch the view to a weekly chart (a bullish flag). The path of least resistance remains higher, and that rings true for copper, base metals, agrifoods, or oil. If in doubt, look at lumber marching unimpeded to new highs.

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