Inflation trade is back
Yields have been trading in a downtrend in the daily time frame since early may, at the same time that equities recovered from April pullback. Curiously, the Russell 2000 has not been able to catch a bid and is still lagging as big tech names keep leading. Early in may there were clues it was going to be that way:
Now we are in a situation where few stocks are sustaining the rally (mostly these big cap tech) and liquidity is being removed out of the system, which in part explains the flight to quality that these big tech /AI related stocks represent.
This can continue driving the market even higher as we have seen many times. Guessing tops is a dangerous game. If you keep in the best names you’ll be fine, as always. Take into account that call buying can keep this moves higher than most people could expect, as dealers buy stocks to cover their short call option option book to be delta neutral.
But conditions have changed and you must incorporate new information to build the right situational awareness and trade accordingly. Reality is that breakouts have been failing and volatility is increasing, as short term options implied volatility is increasing related to mid term implied volatility:
This is not a trading signal but a piece of information that tells something is changing and you must pay attention in case this keeps evolving in that way.
Another piece or information is what’s happening with the inflation theme. As you know, the most important price for the inflation calculations is gasoline so I track how it moves related to oil. Gasoline can validate the price / move in oil or not. It had not been validating the higher prices in oil, till now. That is new information that triggers the idea that inflation could be hot again soon, specially if this keeps going on.
We will see what happens here, this is a hand by hand combat, as the best says.
The reaction to this perception has been a strong bid in metals, after some normal correction.
Here are de weekly and daily charts of the stocks showing up in my principal scan:
Weekly:
Daily:
What about the other sectors?
See for yourself:
Industrials (XLI) lower highs pushing against tripple bottom. Price structure that suggests caution.
Retail (XRT) breaking down.
Financial (XLF). Maybe an inverse H&S. Looks good, but will see. Yiel curve has reversed its previous week’s steepening and that was a head wind for the sector this week.
Energy (XLE) testing the trend line after breaking out.
Transports (IYT) against resistance after a double top.
REITs (IYR) flagging. Good consolidation. Needs rates lower.
Technology (XLK) is acting very strong. All time closing highs
Healthcare (XLV) falling after a tripple bottom.
Semiconductors (SMH) has recovered and it has good charts in individual stocks. Needs NVDA to get in traction again.
Homebuilders (XHB) breaking down and losing the 200 DMA, This is a bid red signal.
Materials (XLB) with LH and LL bellow the 20 and 50 DMA.
Communication services (XLC), outperforming. New ATH. GOOG / META / NFLX leads.
Staples (XLP) gaining traction after a doulble bottom (defensive bet) but not higher highs yet.
Ciclycals (XLY). New ATH, strong sector. AMZN and TSLA did their work here.
Utilities (XLU) wedging. The bid this sector had shown related to the electricity demand to feed the AI era has gone, for now. But the pattern is clean. A breakout of the wedge is a trigger for longs here.
Biotechnology (XBI) consolidating with Lower Highs and Higher Lows (similar to the Russell 2000).
What matter most are the big 8 tech stocks. Money keeps flowing there, although some others tech names looks good (semiconductors, software and cyber security related stocks), like AMD, PLTR, CRWD, PANW, etc.
But as I wrote above, the inflation theme is regaining strength under the surface, again. Commodities are changing into bullish price structure. Keep an eye on this.
CONCLUSION.
The best stocks showed itself in early May and they keep leading. Few stocks joined to them, participation has diminished and failed breakouts presented everywhere recently, in a liquidity drying up in a remarkable way. Keep trading them and keeping an eye on metals too, is the idea. Not many setups in new names out of semis / software and cyber security) and not interested in other sectors. However, volatility increasing should triggers almost 100 cash soon, and only long metals if the information that could suggest a come back in inflation keeps coming in.
Good trading week.