What Financial Markets Are Telling Us: A Turnaround In Equities Is Approaching

Overblown fears of permanent inflation is driving interest rates higher and equities lower despite actual readings of inflation expectations declining. These contradictory signals suggest the market downturn will soon end and the S&P 500 will move back to the midpoint of the current range. The volatility risk premium points to a higher market over the next few days, while my technical reading of key stocks in the S&P 500 is bullish. Yesterday's cross-asset action brought several positive factors for US stocks. Copper's chart is signifying global growth. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there were also several negative factors across global asset classes. Gold is signalling inflation fears. Oil is pointing to stagflationary conditions. Expect the S&P 500 to be range-bound for another few days before moving higher as earnings season unfolds.

The bulls haven’t given up despite the Fed’s pivot to hawkishness and the bond vigilantes’ shrill warnings of permanent inflation. Hedging by investors in equity derivatives once again fell as the market declined, which means the bulls unwound positions rather than maintained them in fear of further declines. The VIX’s small move yesterday also indicates the market is approaching a short-term bottom, as it would only take a small move down in the VIX go generate a classic buy signal. The $US hasn’t risen uniformly against either DM or EM currencies, suggesting foreign investors don’t believe there will be further bargains in equities and so haven’t been accumulating dollars for future investment. While gold is breaking out copper is holding solid and oil is raging higher, all suggesting further $US weakness and modest global growth along with transitory inflation. These signs suggest interest rates won’t head much higher and that will restore command to the bulls.

My other current market positions include a large cash position, and the following holdings: Amgen (AMGN), American Express (AXP), Goldman Sachs (GS), Johnson & Johnson (JNJ), 3M (MMM), Starbucks (SBUX), Titan Machinery (TITN) and a long position in the S&P 500 (via the levered ETF UPRO).