Stocks are in trouble.
Yeah, yeah, there’s a lot of press about “buy signals”…
And how the “rally can resume…”
But what’s the REAL picture?
Don’t look at the market itself.
Outside pressures are mounting. Three of them, actually.
I call these the Triple Threat for Stocks:
- The US Dollar
- Interest Rates
- Inflation
In general, a rising US Dollar Index has an inverse correlation with the broader equity market.
Similarly, higher trending interest rate yields and inflationary expectations will add additional pressures, particularly for growth (“Risk-On Assets”) like technology stocks.
When all three are rising in unison, this can spell real trouble for equities.
In the first quarter of 2024, the broader markets continued their bullish ascent, largely driven by global liquidity and the large Mega-Cap Growth/ Semiconductor market leaders.
However, coming into the second quarter, many of the momentum/growth stocks which were previously driving the market started losing upward momentum.
We then started seeing some rotation into other areas, such as commodities (i.e. Energy/Precious & Base Metals, etc.).
Around late March to mid-April 2024, all three outside pressures began moving higher in unison.
The US Dollar Index went up.
Interest rates went up (10-Year Note Yield).
And inflationary expectations went up – the bond market relatively pricing in increasing demand for Treasury Inflation Protected Securities vs the 20-Year Treasury.
Now take a look at this chart:
As this was happening:
- The SPX broke an upward diagonal support line.
- It bounced up but couldn’t make higher highs one week later, and then…
- …rolled over as the U.S. Dollar, Interest Rates, and Inflationary Expectations continued higher.
That’s The Triple Threat right there.
So where do we go from here?
As the market potentially accepts the notion of “Higher for Longer,” one area we remain bullish on over the longer term with respect to elevated and persistent inflationary pressures is commodities.
In an inflationary environment where commodities tend to outperform, a fund well suited to capture a broad basket of commodities is the DB Commodity Index Tracking Fund (DBC).
This fund has a blend of Energy (54.94%), Precious Metals (11.49%), Agriculture (19.61%), and Base Metals (13.93%).
Additionally, the SPX recently bounced Monday April 22nd. One might anticipate some potential upcoming overhead resistance and/or consolidation around the price levels identified:
So you see, it’s not enough to keep up with the market itself.
If you want to know where it’s headed, you have to look at the outside factors pushing on it.
When that Triple Threat gets going, traders will have to pivot fast to find the next upswing.
See you on the next one,
Serge & JB
