Squaring The Bets Prior To The Fed

Barely visible, but still a red candle – does yesterday mark a turning point? Even the volatility index refused to decline further on the day, and the option traders increased their put allocations. Is this a real reason to be cautious, or it represents mere window dressing before the Fed?

When it comes to the sectoral view, not much has really changed in the S&P 500. Technology rose yesterday but gave up all intraday gains. Value stocks appear ready for a breather, and financials, energy and industrials all declined. That doesn‘t bode extraordinarily well for today‘s session, but this is not the place to look at when it comes to trading today‘s markets.

It‘s the long-term Treasuries that I am focused on the most. Still as extended as lately ever relative to their 50-day moving average, they‘re weighing heavily on the markets. Stocks have gotten used to their message of rising inflation and economic recovery as we‘re still in the reflation phase, and not in the inflation one – but it‘s the precious metals that are suffering here, showing best in the copper to 10y Treasury yield ratio.

I am not looking for the Fed to act today by adjusting its forward guidance stance or language, or taking a U-turn on inflation. No, they‘ll maintain the transitory stance even though markets are transitioning to a higher inflation environment already. The Fed won‘t do much this time.

My prior Monday‘s words ring true also today:

(…) Inflation expectations are rising, but not galloping yet. What to make of the rising rates then? They‘re up for all the good reasons – the economy is growing strongly after the Q4 corona restrictions (I actually expect not the conservative 5% Q1 GDP growth, but over 8% at least) while inflation expectations are lagging behind.

In other words, the reflation (of economic growth) is working and hasn‘t turned into inflation (rising or roughly stable inflation expectations while the economy‘s growth is slowing down). We‘re more than a few quarters from that – I fully expect really biting inflation (supported by overheating in the job market) to be an 2022-3 affair. As regards S&P 500 sectors, would you really expect financials and energy do as greatly as they do if the prospects were darkening?

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Monica Kingsley 1 month ago Author's comment

Smashing reaction to the Fed indeed - and across the board. I hope you've benefited from my calls on the stock market and also from the reluctance to throw the metals overboard. No need to write off the upswing, we're progressing nicely, and I stand by my call that we might very well have seen the bottom on Mar 08.

Enjoy your profits!

Monica Kingsley 1 month ago Author's comment

Fed day is here, and stocks are modestly lower. Is this the result of weakening bond markets? HYG, LQD, TLT... Talking Treasuries, why isn't gold and silver declining? Are the bulls just hanging out for an unlikely (yeah, I think so) surprise?

We have more divergence between the stock market and corporate bonds. Which would pull the other - or is it an entirely wrong way of looking at the markets?

Look at the big picture - stocks are still the place to invest in! Those relying on 60-40 allocation rules are likely to do badly in these times, when more active trade and money management is required.

Enjoy the daily articles, updates, and thank you!