Goldilocks Never Looked So Dull But The Bulls Will Take That — What Fixed Income, Currency & Commodity Markets Are Telling Us

Belief in disinflation drives the equity bulls despite the recent rallies in oil and gold, and the persistence of high inflation that most Fed Governors believe is public enemy #1. But today’s PPI report gives the bulls a fillip as does the bond market’s continued belief in eventual Fed rate cuts, and that’s pushing equities higher this morning. The volatility risk premium is pointing to a range-bound market over the next few days, but 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. The US yield curve is falling and in the current context that is bullish. But there were also several negative factors across global asset classes. Gold is trading as a risk-off asset. Oil is pointing to stagflationary conditions. Expect the S&P 500 to rise modestly over the next few days toward resistance at 4200.

Commodities are pointing to intermediate-term sturm and drang signifying nothing. Oil is pulling up the rest of the fossil fuel complex but this is likely to reverse as oil hits resistance levels from here. Precious metals are rallying but industrials are lagging, suggesting a reversal is possible if the dollar begins appreciating. Most foods are making unconvincing rallies as well. This bodes well for disinflation, confirmed by this morning’s PPI data.

Fixed income markets are clearly on board, as not only have long rates declined but inflation expectations have been muted for months now. The ongoing weakness in the dollar points to low but persistent global growth, suggesting a lusterless goldilocks economy. The bulls will take this and justify high equity valuations but the weakness of their argument will be made clear as earnings come out this month and point to continued declining quality. That combined with the desultory cultural and political trends will be the knife that cuts this bear market rally down to size.

My current positions include a very large cash position, 3M (MMM), Pfizer (PFE), the levered ETF UPRO and inverse levered ETF SPXU, all of which net out to a modestly long position in large-cap equities.