Hey There Income Hunter,
Now that the Fed is nearing the end of its tightening cycle, the stock/bond correlation is back to its historical norm.
This is a hugely important signpost for getting an edge trading stocks.
You see, market participants had become accustomed to thinking good news is bad and bad news is good for stocks and bonds together.
But the past couple of weeks the relationship has gone back to normal, meaning good news for stocks was bad news for bonds …
This is not good for the Fed. Here’s why …
The True Story
We are always talking about how bonds tell the true story about growth in the economy and inflation …
Well, this week’s price action may be signaling that a melt-up in stocks could be in the cards for Q2.
Here is a great way to see the stock/bond dynamic in pictures. The chart below highlights the glaring anomaly between high-worth individuals and lower-income consumers.
LVMH caters to the high-net worth crowd and it is at all-time new highs …
Meanwhile Big Lots targets lower income families and operates more than 1,400 stores across the US with 22 million members – and it is trading near the lows of the past year.
What the above chart reflects is that, for most of the consumer base, times are tough and they have cut down on spending … while the top 10% has been spending like crazy.
That same top 10% is holding a large majority of stocks in their portfolios and lots of cash on the sidelines, which could fuel an extended rally in stocks.
Rates Top & Stocks Bottom When Fed Pauses
With the strong economic numbers this week including:
– US DURABLE GOODS ACTUAL 5.6% (FORECAST 2.5%, PREVIOUS -2.1%)
– US INITIAL JOBLESS CLAIMS ACTUAL 186K (FORECAST 205K, PREVIOUS 190K)
– US GDP QOQ ADVANCE ACTUAL 2.9% (FORECAST 2.6%, PREVIOUS 3.2%)
Plus, with the CPI change that will magically lower inflation, we could see an end to Fed tightening and lower year-over-year inflation in the weeks ahead.
This presents an ideal investor FOMO melt-up trade to record highs.
Think about it …
China reopening, central banks back to easing, inflation tanking …
While some big media names are still calling for 3,200 in the S&P 500, as traders you want to be ready for the unexpected.
Bring It Home
This week was an eye-opener because the stock market broke the pattern of good news is bad news.
That signals a market looking beyond the current environment with a Fed that may have run out of hawkish bullets to fire at this rally.
Traders are now accepting SPY 400 and a breakout to the upside. The algos will jump in big time if that happens.
I’m looking at longer-term (March or April) calendar spreads in silver miners and natural gas producers.
Have a great weekend and always …
Live and Trade With Passion My Friend,
