The month feels like it is flying by, with investor’s attention switching from WallStreetBets to the Texas snow storm which has caused major power outages and a surge in WTI crude oil. The impact of this is being felt throughout the major asset classes, including fixed income, currencies and equities. The upwards pressure on energy prices is clearly inflationary, and has caused a ‘back-up’ in treasury yields this week. This has seen a reaction in the equity markets, where the rotation away from tech and in to value is again being reported. Although a weak US dollar has been kind to stock investors recently, rising yields are seen as particularly troublesome for many of the high-fllying tech names and other growth segments that are typically rate sensitive.
Nontheless, despite the apparent rotation taking place beneath the surface, equity markets have mostly held their ground this week. I have seen several analysts making headlines with their prediction for a ‘10% correction’, and ‘higher bond yields threatening the bull run’ in the stock market, but frankly, but this is little more than noise. Our Checklist process correctly identified the fundamentals as supportive for risk markets, and equities specifically, as we began the month. Here’s a reminder of how this was set up in our Market Risk Checklist:
The positive bias has been reflected in the outperformance of the industrials / consumer staples sector ratio, which has staged a decent rally off the low seen towards the beginning of the month.
The stock market, despite closing negative a couple of days this week, has been on a tear since it retested 3700 and the technical picture suggests a continuation towards 4150-4200 is still likely…
…though of course, the fundamentals represented by our Equities Checklist will need to remain positive.
In the meantime, perhaps the most important chart to focus on is oil. Having staged a tremendous rally from $50 towards $60 since the turn of the year, there could be a significant correction once the Texas weather system passes. Frankly, the traditional fundamentals that we track have gone completely out of the window this month on this developing situation, so it might well setup a reversion in the coming weeks.
For as long as price remains elevated, expect to see implications throughout the various other asset classes. To learn more about our methods, and join me for more analysis in real-time, check out our MDT course and Trading Club pages where you can preview everything that we cover.
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Have a great weekend,
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