The inflation trade went on pause, so did U.S. equities

Change and constant are two sides of the same coin, the yield curve flattens further despite oil hitting $70 a barrel and just as hedge funds took negative bets on the oil price at $30 a barrel, Bloomberg reported that they are now making large bets the price rise will continue. The Bitcoin discussions seem a distant memory as the price has collapsed from almost $20,000 to $11500. The start in the fall of the value of Bitcoins almost coincided to the day of the introduction of derivative instruments. Just as many predicted. The US yield curve flattened again to its lowest point in 10 years, despite equity investors betting on a return to inflation. Last weeks US Consumer Price data and Tuesday’s euro area inflation data suggest inflationary pressures remain close to economist’s expectations.

The US equity market started the day on another positive note, only for a bit of caution to enter the picture. Technical analysts continue to point out, how overbought the equity prices are. One technical analyst highlighted that the monthly relative strength index has never been higher.

One question investors ask, what causes the correction? Sadly, this is not something anyone can predict. If we could, then the market would correct in anticipation of the event, and that will cause the correction. Otherwise known as the efficient market theory, all known information is priced in at that moment in time.

There can often be events that cause a correction, other times it can just be a moment in time. When the current market run does correct it may well be hard to react both ways. One senses that despite the feeling of euphoria there is still cash on the sidelines, after all, there is still little in the way of alternatives to equities. That could make the correction swift, and assume that sentiment towards the global economy remains intact, the recovery could be just as quick. One trend that was broken on Tuesday was the cyclical v utilities. The start of the year has been dominated by the outperformance of the inflation sectors against sectors such as the utilities that do not benefit in a rising rate environment. This trend was broken on Tuesday, that could be a sign the correction may be on the horizon.

Posted on January 16, 2018 .