There's a massive divergence occurring in US markets that as of Friday's close remain unresolved. The current disconnect while short-term in nature boldly reflects the degree to which distortion has impacted price action.
We are seeing $GOLD looking to breakout of its multi-year apex pattern as indicated by futures contracts expiring this month just as the $USD continues its slide lower. While this is the "traditional" inverse correlation between the two, the move seems to be confirmed by the sharp rally in bonds and this is precisely where the disconnect lies as it relates to the spectacular move to all time highs in the major indices off the May lows, with the exception of the $RUT which could actually prove to be the canary in the cold mine. But the point being is that with the $VIX brushing shoulders with all-time lows it's hard not to expect some kind of reversion to the new norm unless of course current existing correlation patterns are set to change back to perhaps that ol weak $USD being good for earnings again thing. That would no doubt be viewed as a reversion to the old norm or in other words the official death of the Trump trade and back to that pre-election same old same old. However, with the Fed poised to raise rates this month as well as later on this fiscal year it's difficult to see markets continuing to rally exclusively on the back of the Nasdaq all-stars(which has also become the new safety trade as overall exposure to the "trump trade" is neither here nor there) without broader participation.
While we have to respect the rising tide in global markets lifting most boats we must also keep in perspective the extent to which current headwinds facing US markets persist especially those coming out of Washington as the upside capacity for the $RUT in particular rests in the hands of the Trump Administration's ability to carry out its agenda, not to mention we can clearly see the impact the DC drama has had on the $XLF which at a 16% weighting in the S&P 500 can absolutely create a drag in price performance. Pile on the chess game of chicken OPEC and US producers continue to play and you get lower oil prices which is arguably good for market fundamentals as it relates to consumer spending but the initial reaction in stock prices will be lower as lower oil prices result in lower corporate earnings across the industry.
Lower rates and higher bonds prices not only contradict intentions coming out of the Fed to hike rates, it is also NOT what the sparked the election rally, so we need to be vigilant as to which assets/industries funds are rotating into. The landscape remains in flux as new safety trades continue to emerge in the form of technology innovation and everyone's investment thesis diverges from the hopes of stuff getting done in the swamp to the faith they hold in the gods of Silicon Valley, but with $GOLD on the cusp of embarking on new territory and bond prices rallying in the face of a coming fed rate hike, OPEC and non-OPEC playing huckleberry, the dollar still looking quite weak in the knees, and a $VIX that's not reflecting the bubbling geopolitical backdrop, their unwavering faith in the leaders of the tech renaissance will indeed be put to the test these coming days. That said, I for one wouldn't necessarily expect any kind of correction as much as I expect the current divergence to get resolved soon and very soon. If anything, it's safer to assume Wallstreet's buy the dip policy remains in full effect.
Happy trading,
Nish Eastwood