Lather, Rinse, Repeat

Well, this is easy. Buy stocks, pause for a few days, then watch them rally again.

If you are looking for a market that responds to the ebb and flow of economic data, you can forget it. This market has nothing to do with the economy, let alone the negative coronavirus news flow. If fact, you can argue that 'bad news is good news' for the growth stocks. Having been vaccinated from risk by the Fed, they now have economic herd immunity.

Looking for a pull-back from the overbought and extended market has become a popular pastime. But without any sign of one, there is a growing frustration amongst many market participants. Their lack of conviction is evident in the low readings of future upside from the AAII survey (below). These long suffering bears have been patiently waiting for good news before committing further to the equity market. But sitting in a zero yielding cash account is starting to weigh on them.

AAII Bullish %

This is a market that I both completely understand and simultaneously hate. Microsoft, Amazon, Google and Apple will continue to rally until there is something more attractive to buy. That will take a strong economy and higher interest rates. Not a likely outcome, given the recent fears of an out-of-control pandemic that are holding back the recovery.

Encouragingly, yesterday saw a huge breakout in Chinese and emerging market equities, offering hope for market players looking to cash out their U.S. growth stock winnings. Given the backdrop of better virus control and strong fiscal stimulus, China is looking relatively attractive by default - as is Europe for the same reasons. Time for a European investment vacation?

Yesterday's EEM breakout was accompanied by a relative strength downtrend break, furthering the bull case for a rotation out of U.S. assets. This is a template for the rotation trade into the neglected value stocks that awaits the U.S. market at some point when the narrative switches to a more robust cyclical recovery.

Emerging Markets ETF

Until that time, the U.S. market will continue to be stuck in the shower with that same bottle of shampoo.

Risk Model: 4/5 - Risk On

The lone holdout in the model, as noted above, continues to be the high level of bearish sentiment expressed by AAII survey participants. Also as noted, they are not expected to change that view until presented with actual evidence of a durable economic recovery.

That may come in time, but for now the market is simply a function of the easy-money Fed pushing investors into the economically advantaged growth stock market subset.

Lather, rinse, repeat.

Dr Copper Speaks!

Copper prices continue to power ahead but the market has gone into backwardation. The spot markets are pricier than the forward months due to the supply shortfall due to mine closures that followed recent Covid outbreaks in Chile.This dampens my confidence in the bullish implication from the Copper/Gold ratio as it may portray a false sense of stronger economic growth. But the model is the model. Besides, the 'buy' signal predated the recent supply curtailments. Global demand for industrial commodities has recovered surprisingly quickly from the shut-down induced price collapse.

Copper/Gold Ratio

Lumber is another example of commodity strength that has benefitted from a combination of Covid related supply curtailments and recovering demand. Watch out bondies, the inflation pipeline is slowly building!

Lumber