Market Rallies On Powell's "Easy Money" Promise

 

Powell's Easy Money Promise 03-27-21, Market Rallies On Powell’s “Easy Money” Promise 03-27-21

I could almost repeat last week’s market update.

“Over the past week, the market didn’t make a lot of headway, as price rises were limited while intraday dips got repeatedly bought. Such is what we would expect with the ‘money flow’ indicators we have discussed over the last several weeks back on “sell signals.” (Importantly, note that Friday’s early morning decline held the uptrend line from the October lows.)”

This week was much the same story, with stocks slopping around all week. However, on Friday, a late afternoon buying surge sent the market back to all-time highs. Again, as noted, stocks haven’t made a lot of headway since the February peak despite a lot of volatility. But Powell’s promise of continue “easy money” certainly didn’t hurt.

Powell's Easy Money Promise 03-27-21, Market Rallies On Powell’s “Easy Money” Promise 03-27-21

As discussed last week, the “sell signal” triggering on a short-term basis coincides with our concerns of quarter-end rebalancing for pension funds. We discuss the confluence of the long- and short-term indicators and the market’s potential outcome in Thursday’s “3-minutes” video.

I think we saw a good bit of that rebalancing this past week and are likely close to its conclusion. As noted, the positive weekly money flows keep downside risk somewhat mitigated for now. As seen over the last two weeks, dips continue to be bought despite overall price weakness. We also see relatively rapid rotations between the defensive and offensive market sectors. As stated previously, such suggests rallies may remain limited until the subsequent “buy signals” are triggered. 

Powell's Easy Money Promise 03-27-21, Market Rallies On Powell’s “Easy Money” Promise 03-27-21

I suspect we may have some additional quarter-end rebalancing risk early next week. However, buying on Thursday and Friday next week, as second-quarter positioning gets underway, would not be surprising.

As such, hold positions early next week and look for weaknesses to add to exposures as needed.

The Dollar’s Silent Action

Over the last couple of months, we repeatedly discussed the market’s ongoing rise, particularly the “value” rotation, depended on continuing dollar weakness.

The recent rotation to value has been primarily a function of a “weaker dollar,” which boosts commodities. As noted, if economic growth does strengthen, leading to higher rates will attract foreign inflows into the dollar for a higher yield. Such also undermines corporate profitability, given that roughly 40% of corporate profits are from abroad.

The dollar has been gaining strength this year on expectations of more robust economic growth. A break above the 200-dma could accelerate buying as shorts begin to cover their positions. 

Powell's Easy Money Promise 03-27-21, Market Rallies On Powell’s “Easy Money” Promise 03-27-21

The risk not factored into the current “value” trade is the inflation and interest rate increase due to the massive amounts of stimulus. However, that stimulus will quickly flow through the system, leaving consumers tapped by higher inflation and rates eroding disposable income.

In other words, the “value trade” could be just a fleeting as the “economic recovery” itself.

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