“That's the greatest comeback since Lazarus.” - Sid Waddell
What a difference a couple of weeks makes, huh?
At the end of April, I was interviewed on Real Vision making the case that there was a “very real chance of a Spring Crash” for stocks, noting the severe weakness in Lumber at the time, strength in Utilities (XLU) and Treasuries (TLT), and breakdowns in various other economic datapoints which indicated that something was ridiculously wrong with markets. Divergences were everywhere, and seemingly after that segment many on Twitter (@leadlagreport) started coming around to the predictive power of Lumber (something which I co-authored an award winning paper on).
The decline started to play out, and the crescendo from an economic standpoint came from global PMI data, collapsing inflation expectations (TIP), negative yields globally, and slow jobs growth. Then, right on queue, central bank rhetoric started to change. This is not just a US situation, as we clearly see that Draghi over at the ECB is now likely to take further actions to try to revitalize reflation. In a follow-up segment last week (S&P 500: There's Still Something Ridiculously Wrong (w/ Michael Gayed) | Trade Ideas), I still argued that the risks were there (but lessened), and that at the same time we may see a “central bank overreaction” to crash risks which could cause a meaningful move higher in reflationary trades.
Lumber has had quite a pop in the last several days, and in latest The Lead-Lag Report, I’ve noted that Lumber prices were finding a base and that we may be headed for a strong period to come in global cyclical trades. See below from Monday’s Report.
It appears Papa Powell and the League of Extraordinary Bankers globally are likely to cut rates, just as the market demands, precisely because crash risks have been very very real this late in the cycle based on intermarket analysis. The S&P 500 (SPY) is essentially back at new highs, but I remain nowhere near as excited about large-caps as I do beaten down small-caps (IWM) and emerging markets (EEM). With the Dollar now likely in my opinion to break down further, commodities are likely to finally get a bid as well. Gold has gotten a lot of attention (GLD), and I suspect the final confirmation will ultimately come from inflation expectations. This chart below, and this chart alone, is the only thing central banks care about.
So yes – we may be in for a Summer Melt-Up where it’s the beaten down reflationary trades that have completely failed to rally since late January 2018 get the most momentum. For the bulls, this could be a really nice juncture to play catch up against large-caps. For the bears, perhaps we may be entering a period where the bet is against bonds, with yield curve steepening potentially coming.
Markets aren’t as efficient as conventional wisdom would have you believe. Gaps often appear between market signals and investor reactions that help give an indication of whether we are in a “risk-on” or “risk-off” environment.
The Lead-Lag Report can give you an edge in reading the market so you can make asset allocation decisions based on award winning research. I’ll give you the signals--it’s up to you to decide whether to go on offense (i.e., add exposure to risky assets such as stocks when risk is “on”) or play defense (i.e., lean toward more conservative assets such as bonds/cash when risk is “off”).
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The Lead-Lag Report is provided by Pension Partners, LLC, a federally registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. All opinions and views mentioned in this report constitute our judgements as of the date of writing and are subject to change at any time. Information within this material is not intended to be used as a primary basis for investment decisions and should also not be construed as advice meeting the particular investment needs of any individual investor. Trading signals produced by the Lead-Lag Report are independent of other services provided by Pension Partners, LLC, and positioning of accounts under Pension Partners’ management may differ. Please remember that investing involves risk, including loss of principal, and past performance may not be indicative of future results. Pension Partners, LLC, its members, officers, directors, and employees expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.