Little Growth + Inflation = Stagflation
- The Rotation Trade May Have Run Its Course…
- …Copper / Gold Ratio Rejected at the 200-Day Moving Average
- The Inflation Thesis is Beginning to Play Out as Well
- Near-Term Conditions Call for a Bit of Caution
- Too Far, Too Fast in the Precious Metals Space?
The odds of a stagflation environment are continuing to rise in our opinion. Over the past few weeks / months we have made this view clear by looking at both sides of the coin, growth and inflation. Over that time, the evidence continued to mount in favor of our view. This is likely to have impacts on different asset classes which will determine the best type of portfolio construction. Our thoughts here remain the same in that we look for growth to lead value in the equity space with a leaning toward large caps. Precious metals will likely continue to be a solid store of value as inflation erodes the purchasing power of our currency, a theme that is playing out around the globe.
Being discounting mechanisms, markets have already begun to favor these trends and we have been writing about them for some time. As such, there is no change to our view. What has changed, however, is that the market appears to have corrected some of the froth in the growth / value theme and is now offering another opportunity to establish / add to the theme. The “rotation” trade that so many are hoping beyond hope will pan out took place as copper was rallying relative to gold (green box). Now, the ratio has met and been rejected from the declining 200-day moving average, setting the stage for the reemergence of the growth theme, just as QQQ is oversold based on our indicator.
The SPDR S&P 500 ETF has a Neutral Chaikin Power Gauge ETF Rating (down from bullish last week) and is leaving an overbought position. The fund is above the rising long-term trend line which is in the support zone that we have been highlighting between $300 – $310. Chaikin Money Flow remains bullish. Last week, SPY tried to break through the top of the recent range but has been turned back. The trend from the March 23rd lows remains in place but there is potential for more choppy trading / weakness in the near-term.
As always, the better information is under the surface. Last week, we began to opine that the rotation trade may be coming to an end and that view remains in place this week. As the SPY and IWM have Neutral ETF ratings, the Invesco QQQ Trust continues with a Bullish rating. The fund is now in an oversold position based on our indicator and it remains in an uptrend. The weight of the evidence continues to support QQQ outperformance (this does not mean they will not go down if there is a leg lower in the equity market). As we noted above, the ratio of copper to gold, that has been so important in shaping our strategic market view, is beginning to move lower once again.
The rotation over the past few weeks has likely served to reset positioning and skim some of the excess froth from the growth over value trade. It makes sense to begin to look for opportunities in the growth theme once again. Here is a screen of Growth Stocks with a rating of Neutral or better which are oversold with strong money flow and strong relative strength. This screen was run as of yesterday.
At the same time, the inflation portion of our thesis is now beginning to play out as well. Looking at the chart of the five year breakeven inflation rate, we can see a spike of nearly one percentage point over the past few months as the fiscal and monetary stimulus have contributed to the weakness of the US dollar and are now beginning to erode our purchasing power.
Look no further than the utter collapse of the US Dollar over the past few weeks. Admittedly, I had been in the bullish camp on the greenback under the premise that while we were doing all that we could in the US to weaken the currency, at least we were not alone. The rest of the major economies around the globe were doing all that they could to weaken their own currencies. I was wrong in my bullish dollar view and was made aware of that when the Invesco DB US Dollar Bullish ETF (UUP) broke the key $26 level. While a near-term bounce can’t be ruled out, the trend in the dollar appears to have shifted to one that is bearish.
As the US and others compete in a seeming race to zero as it relates to currencies, we can see the impact in the areas of the market away from equites where we have been and remain bullish, the precious metals. Over the past few weeks / months we have highlighted the strength in gold, silver and the miners. We remain bullish on these themes from a trend perspective but would not chase current strength as the products are extended to the upside as we can see in the chart of GLD, the SPDR Gold Trust.
The Near-Term Could Be Choppy
While our core view remains intact, both the SPY and IWM are now at / near overbought positions to go along with their neutral ratings. With this in mind, a bearish trade can be opened in the iShares Russell 2000 ETF (IWM). The September 4th 148 / 133 Put Spread is priced at $426 ($147.62 reference for IWM).
Actions This Week:
Add: IWM Put Spread
Remove: TWOU which has seen Chaikin Money Flow turn bearish as the stock trades near 52-week highs.
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