Stifling Air Quality Over The East Coast Only Proves The Bulls Can Power This Market Indoors — What Fixed Income, Currency & Commodity Markets Are Telling Us
A new normal of higher for longer equity valuations that somehow corresponds to higher for longer interest rates has inspired the bulls to dream of making new highs this year. Currency stability and commodity disinflation give some substance to this belief, while AI-inspired costs that somehow translate into earnings does too. Consequently 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. There is one negative factor across global asset classes. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to rise modestly over the next few days to 4308 before correcting violently.
Low equity volatility has kissed its cousin in the bond markets, suggesting that current levels of interest rates can remain for some period. This is making the bulls feel more secure but why anyone would choose equity indices trading at earnings yields roughly equivalent to interest rates is left unanswered. Instead the bulls rely on unquantifiable forecasts of heavy AI spending leading to associated earnings to suggest that valuations are justified. Similar logic was heard in earlier melt-ups.
The only substance to the steady course of disinflation, which for the Fed is distressingly snail-paced. The bulls ignore the Fed and hope that commodities are a leading indicator of consumer preferences for low prices. Fossil fuels have rebounded but remain highly likely to retest the lows of May. The same holds for metals, most strikingly in gold which broke support despite numerous recommendations among strategists who watch central bank activities. Foods and softs are generally in the same boat. Commodity disinflation is a positive for the Fed but weakly so, as services inflation and even housing prices continue to move higher as higher interest rates become the new normal. That eventually raises the cost the owning equities, making it only a matter of a melt-up finale to put this bear market rally to bed.
My current positions include a large cash position, 3M (MMM), Pfizer (PFE), a moderate position in the levered ETF UPRO and a slightly smaller position in the inverse levered ETF SPXU, all of which net out to a small long position in equities.