Despite Surging Inflation, The Bulls Shake Off Weakness

Well, that didn’t work out as planned. Last week, we said:

“Notably, the ‘money flow buy signal’ seemed to cross; however, we need some follow-through action on Monday to confirm. As shown, the uptick in money flows did allow us to add some exposure to portfolios in holdings we had taken profits in with the previous ‘sell’ signal.”

Well, that follow-through failed to occur. Not only did the “buy signal” not trigger, but the market also broke down through the previous consolidation range. As I said, it did not work out as planned. The last exposure we took on is now pressuring the portfolio momentarily, but we should benefit from the turn if we are correct.

With markets deeply oversold on a short-term basis, with signals at levels that generally precede short-term rallies, the rally on Thursday and Friday was not unexpected. Notably, the S&P 500 did hold support at the 50-dma and rallied back into the previous trading range. Furthermore, institutional investors have cut their exposures by 50% in just two weeks, primarily big tech, which provides fuel for a rally.

We will hold exposures at current levels for now. However, instead of looking for a more extended rally into mid-summer, we suspect this rally will be pretty short-lived.

As stated last week, overall, the market trend remains bullish, so there is no need to be overly defensive. We still expect to see a deeper correction as stimulus fades from the system in the next month. At that point, we will become more defensive in positioning as the peak of economic growth and earnings becomes more apparent.

An Inflation Primer

On Thursday’s “3-Minutes” video, I review the recent inflation numbers to put them into perspective. While there is some panic over the headline numbers, there are valid reasons to expect inflationary pressures to be transient.

As stated above, we expect inflation to subside later this year, along with economic growth.

As such, we continue to focus on our risk management accordingly for now. If we are correct in our assessment about the roll-off effect of stimulus and liquidity, we could well see bonds outperform stocks in 2022. We are watching very closely as we currently hold minimal duration in our fixed-income portfolios. If we begin to see the very negative sentiment on bonds reverse, as inflationary pressures subside, we could well see an excellent buying opportunity.

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