Navigating The Tidal Wave Of Liquidity

S&P 500 moved marginally higher in spite of its short-term very extended position, powered by liquidity and almost defying the odds. Credit markets were hinting at deterioration, the yen carry trade I talked about a week ago has run into a brick wall as viewed by the USD/JPY exchange rate reversal – but stocks didn‘t listen, and their market breadth indicators are actually quite healthy.

We‘re still in the rare constellation I discussed two days ago – Treasury yield moves are exerting no real pressure either on value stocks or technology including heavyweights, which are picking up the tech upswing slack. Microrotations still pointing higher are the name of the game, on the wave of infrastructure bill expectations as well.

Still, the risk-reward ratio for the bulls is at unsavory levels in the very short run even as the longer time frame perspectives remain really bright. Consider these points made yesterday:

(…) we have seen quite a record number (around 95%) of stocks trading above their 200-day moving averages, which is similar to the setup right after the post-dotcom bubble bear market 2002/3 lows, or 1-2 years after the bull market run off the Mar 2009 lows. Hard to say which one is more hated, but I see the run from Mar 2020 generational low as the gold medal winner, especially given the denial accompanying it since.

Gold kept its run above $1,740 intact and regardless of the daily weakness in the miners – should that one be repeated more consistently, it would become worrying for the bulls. Looking through again at the USD/JPY chart, I‘m increasingly optimistic that the currents working against the king of metals, have turned. That‘s because whenever the yen, the currency perceived by the marketplace as a safe haven one, strengthens, gold tends to follow its cue – and that‘s where we are now. The precious metals run to the key $1,760s or even better above $1,775 is approaching, and has already sent my open gold position solidly into the black.

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