This Isn't The Time To Buy The Dip
Summary
- Stocks are rising on March 1 despite more inflation data.
- The rally on March 1 isn't likely to last and should not be trusted.
- There should be plenty more inflationary data as March moves on.
- Looking for a helping hand in the market? Members of Reading The Markets get exclusive ideas and guidance to navigate any climate. Get started today »
Stocks are rising on March 1, largely ignoring the latest round of data suggesting that prices and input costs continue to rise. The latest ISM report revealed that prices paid increased to 86, which was well above estimates for 80 and much higher than January's reading of 82.1. One would have to go back to the summer of 2008 to find a higher reading on the index, an indication that costs are rising very quickly.
Equities have largely shrugged off the inflationary data, despite 10-year rates rising back to 1.44% and the 30-year climbing to back to 2.22%. Despite the bearish data for bond yields, real yields or TIPS have seen their interest rates fall to around negative 72 bps, which is largely why equities have risen.
More Inflationary Data To Come
The prices paid index is highly correlated to both the producer and consumer prices index. That's likely to suggest a strong year-over-year gain in the CPI and PPI data when it comes later in March.
Not Bullish For Stocks
Today's latest round of data is not bullish for equities and would suggest that rates continue to push higher overall. More importantly, it indicates that real yields push higher as well over time and that today's move lower in real yields is likely just a giving back from last week's rapid rise.
The rise in real yields has massively underperformed the rise in 10-year Treasury rates. That has resulted in breakeven inflation rates moving sharply higher, which has helped send the wrong message overall to the equity market. But as real yields begin to play catch-up to the nominal 10-year rate, it's likely to push those breakeven inflation rates lower, resulting in equity prices following lower, causing massive volatility.
One should care about the breakeven inflation expectations because equity prices have largely been chasing this move higher in recent months. However, the rise in the expectations was due to the large move higher in the 10-year, and because TIPS largely refused to move up.
The last time we saw a big divergence between the two 10-year and 10-year TIPS was at the beginning of 2013. The TIPS yield rocketed higher in that year, sending breakeven inflation expectations lower and creating a great deal of stock market turbulence in the process.
Additionally, the equity market today is trading at a much higher valuation today than in the past. In fact, versus breakeven inflation expectations, the S&P 500 hasn't been this expensive using forward 12-month earnings estimates since the late 1990s. This means that distributions in the TIPS market are likely to cause even greater volatility in the equity market than in 2013.
False Signals
More interesting is that despite the 10-year TIPS yield moving lower today, the TIP ETF (TIP) is trading down, and an indication that perhaps that investors in the ETF do not believe that TIP yields will continue to head lower but will resume their trend higher. The TIP ETF and the S&P 500 have been highly correlated to one another, as one would expect. We can see that the recent move lower in the TIP ETF is likely a leading indicator to where the S&P 500 index moves going forward.
It likely isn't to get any easier as the weeks go on for stocks either, with the ISM services index on Wednesday, along with the ADP job report and the BLS job report on Friday. That means that one really needs to be careful not to chase equity presently because the inflationary data is only likely to grow worse in the weeks and months ahead.
That will at the very least cause a great deal of volatility.
Reading The Markets is designed to provide members with a better understanding of the stock market and to provide stock ideas. Just like the free articles you have grown to love reading.
Or if you want to learn about how the markets function, I can teach you that too.
To Find Out More Visit Our Home Page
This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
Analyst’s 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.
Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (199)
2 Long 12 10/19/00 11/06/00 +8.812 +31.76 Exit Long Rule
3 Long 13 01/08/01 01/26/01 +4.562 +30.54 Exit Long Rule
4 Short 49 01/26/01 04/06/01 +11.130 +57.08 Exit Short Rule
5 Long 17 04/12/01 05/08/01 +1.510 +10.29 Exit Long Rule
6 Short 84 05/08/01 09/06/01 +8.030 +49.63 Exit Short Rule
7 Long 108 10/04/01 03/12/02 +9.270 +131.68 Exit Long Rule
8 Long 25 04/12/02 05/17/02 +5.850 +43.95 Exit Long Rule
9 Short 51 05/17/02 07/31/02 +4.710 +24.58 Exit Short Rule
10 Long 83 07/31/02 11/26/02 +8.950 +61.94 Exit Long Rule
11 Long 62 12/20/02 03/24/03 +4.300 +19.61 Exit Long
12 Short 109 10/20/03 03/26/04 +17.890 +30.02 Exit Short
13 Short 43 06/14/04 08/13/04 +13.120 +26.64 Exit Short Rule
14 Short 42 09/03/04 11/03/04 +2.820 +7.28 Exit Short
15 Long 149 05/03/05 12/02/05 +15.850 +47.73 Exit Long
16 Short 105 12/15/05 05/18/06 +16.870 +34.09 Exit Short Rule
17 Short 33 06/30/06 08/17/06 +9.590 +24.79 Exit Short
18 Long 69 08/17/06 11/24/06 +13.320 +45.79 Exit Long Rule
19 Long 194 01/19/07 10/25/07 +51.190 +138.28 Exit Long Rule
20 Long 110 03/07/08 08/13/08 +22.600 +35.26 Exit Long Rule
21 Short 36 08/13/08 10/03/08 +19.690 +22.71 Exit Short Rule
22 Long 102 11/26/08 04/27/09 +39.160 +89.08 Exit Long
23 Long 236 05/15/09 04/23/10 +70.030 +95.15 Exit Long Rule
24 Long 334 05/14/10 09/09/11 +82.860 +64.47 Exit Long Rule
25 Long 215 11/11/11 09/20/12 +43.420 +19.97 Exit Long Rule
26 Long 60 10/26/12 01/28/13 +37.800 +15.87 Exit Long Rule
27 Long 14 02/15/13 03/08/13 +9.100 +3.43 Exit Long Rule
28 Long 234 08/16/13 07/23/14 +73.320 +25.74 Exit Long Rule
29 Long 250 08/08/14 08/06/15 +212.660 +67.13 Exit Long
30 Long 179 01/22/16 10/06/16 +245.280 +41.13 Exit Long
31 Long 338 11/04/16 03/13/18 +833.130 +110.34 Exit Long
32 Long 105 04/06/18 09/05/18 +589.590 +41.96 Exit Long
33 Long 134 10/19/18 05/06/19 +186.520 +10.57 Exit Long
34 Long 36 05/24/19 07/17/19 +168.750 +9.26 Exit Long
35 Long 133 08/09/19 02/20/20 +345.520 +19.12 Exit
36 Long 121 03/13/20 09/03/20 +1,583.000 +88.68 Exit Long
KEY, #36: Bought AMZN on 3/13/20. Held position 121 trading days, sold 9/3/20, for a gain of 1,583 points or 88.68%.MOST RECENT TRADE. LONG 3/5/21. 4 TRADING DAYS SO FAR. Up 3.77% Position still open.UPDATED 3/16/21
37 Long 7 03/05/21 03/16/21 +91.400 points +3.05% Open
2 Short 63 11/29/10 03/01/11 +2.078 +30.27 Exit Short Rule
3 Long 183 03/01/11 11/17/11 +1.948 +40.69 Exit Long Rule
4 Long 346 01/10/12 05/29/13 +15.402 +278.82 Exit Long Rule
5 Short 43 10/02/13 12/03/13 +7.250 +20.03 Exit Short Rule
6 Long 62 12/03/13 03/05/14 +21.592 +74.61 Exit Long Rule
7 Long 99 04/16/14 09/08/14 +16.600 +41.69 Exit Long Rule
8 Short 91 09/08/14 01/16/15 +17.808 +31.56 Exit Short Rule
9 Short 258 02/06/15 02/17/16 +9.736 +22.40 Exit Short Rule
10 Long 35 02/17/16 04/07/16 +17.704 +52.48 Exit Long Rule
11 Long 187 05/19/16 02/15/17 +12.910 +29.99 Exit Long Rule
12 Long 30 08/08/17 09/20/17 +1.738 +2.38 Exit Long Rule
13 Short 33 09/20/17 11/06/17 +14.226 +19.02 Exit Short Rule
14 Short 338 02/01/18 06/07/19 +28.950 +41.45 Exit Short Rule
15 Long 33 06/07/19 07/25/19 +4.864 +11.89 Exit Long Rule
16 Long 104 09/06/19 02/05/20 +101.450 +223.02 Exit Long
17 Short 21 02/20/20 03/20/20 +94.376 +52.47 Exit
18 Long 33 03/20/20 05/07/20 +70.502 +82.45 Exit Long
19 Long 68 10/19/20 01/27/21 +433.330 +100.58 Exit Long KEY, #19: LONG 10/19/20. Sold 1/27/21, after 68 trading days. GAIN of 433.33 points or 100.58%.HELD TSLA FOR ONE DAY
20 Long 1 03/08/21 03/09/21 110.58 points 19.64% Exit Long Rule
By doing DCA, you are guaranteed to buy the dip, that's how.
Inflation: most of western world been in lockdown. Still 20-30% workers on furlough in U.K. Nothing being made, can’t get supplies. Oil supply lowered. When things open up & more stock, will inflation still climb. It’s down to Opec more than fed. Will they let more oil supply to meet new demands for production. Have companies hedged oil purchases at good rates. Let’s hope so.
begin to tamp down once supply catches up
In the PPI diagram, I was trying to see if, during 2018, the PPI moved higher because of the FED fund rates were moving up (cost of business) or the FED started moving up the interest rate after PPI started percolating up. Without the vertical lines marking the times exactly, it is difficult to see.
