Hello traders
I hope you’ve all had a good week!
The level of activity in equity markets seems to finally be picking up after yesterday’s higher than expected US CPI print, which follows a largely range-bound environment over the past few weeks. In case you missed it, the inflation data came in at 5% – the highest level since 2008 – although the market seemed to see it as ‘transitory’ and downplay (optimistically) the threat of resulting higher interest rates on asset prices.
This was most apparent in the stock market, where following an earlier reversal in bond yields (which initially moved higher), the major US indices rallied. There was also clear outperformance in the more interest rate / inflation sensitive sectors, with tech shares gaining 0.7% and financials losing -1.7% on the day. The likes of PayPal ($PYPL) and Amazon ($AMZN) rose by more than 2%, as notable growth names on my watchlist which have been under pressure since I offloaded them in my portfolio back in February as the reflation / rising interest rate theme really took hold.
The US 10 Year bond yield has really come off in the past week, and is now at an ‘oversold’ extreme. This has certainly driven the likes of Amazon and PayPal higher, along with other tech and growth stocks, and underscores how the market has accepted the current inflation as temporary rather than persistent.
The ECB is also repeating the same mantra, as Christine Lagarde commented in an article published by the Financial Times yesterday;
So perhaps the bond market just got far too ahead of itself in repricing interest rates higher earlier in the year… assuming of course that you also believe that inflation will “return to lower levels” shortly. We should now revert to our process so that we don’t get too far ahead of ourselves, and caught up in the narrative. Let’s firstly remind ourselves of the score for the Market Risk Checklist that I shared here last week.
At +1 it suggests that investors should be rewarded for taking bullish bets in risk assets, such as stocks.
I can also now reveal the specific score that we have for our Equities Checklist, which is also positive with a stronger score of +3.
Despite the hesitation amongst investors earlier in the month, the bull market is very much alive and longs are once more being rewarded for committing to their positions. Here’s an hourly chart of the S&P 500 which shows this since the score was updated in the final week of May.
I also mentioned gold in last week’s post. At the beginning of the month this looked to be a great short setup (as I first highlighted to Trading Club members) with the fundamentals and technicals at opposing extremes. Despite some relief on the back of lower yields yesterday, the spot price appears to be slipping again today. This suggests that the intrinsic fundamentals (Checklist score of -2) are continuing to weigh on gold as we have seen overall since our report was updated on the 26th, when gold peaked around $1910.
Here’s how we arrived at that score of -2.
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Have a great weekend,
James
Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information.
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