The More Things Change

Imagine going on a 9-week vacation to South America with the intent of avoiding anything to do with the U.S. While you were away, Trump started a pointless war, causing oil prices to double, interest rates to spike 50 basis points and investor confidence to collapse. But you see that the stock market is virtually unchanged from the day you left! Investors were put through the wringer. I'm just glad I was in an abandoned 600-year-old city and off the grid when all that was going on.

So has anything really changed? This latest episode is why people often tell me, "I don't understand the stock market". Sometimes it looks like a rigged game. But when it comes to risk asset prices, there are no hard-and-fast rules. The price is the price, so you had better get over it. Don't confuse a bull market with brains.

Stocks are nothing more than the sum total of investors' bets on the future. That future sometimes seems far away when the headlines are screaming sell, sell, sell, but never underestimate the power of a bull market to go further and last longer than you thought possible. Hope springs eternal.

As Baron Rothschild said on the occasion of the Battle of Waterloo, 'buy on the sound of cannons, sell on the sound of trumpets'. It was entirely predictable that the Menace of Mar-a-Lago would TACO after his irrational war spectacularly fizzled out. So if one had followed the good Baron's advice, I suspect you have made a quick buck so far. All that's left is for you to close the loop by selling when Iran agrees to a deal.

So yeah, the market seems literally bullet-proof (drone-proof?). Now that earnings season is taking up more of the narrative, investors can resume their buying and selling as if nothing happened. As if!

But it seems oil price shocks aren't what they used to be. Back in the 1970s, during OPEC days, oil demand as a percent of GDP was twice what it is now, and they controlled twice as much of the market. And at $100/bbl, oil is the same in real terms as it was in 1985 at $40. Tempest in a teapot, I'd say, about this latest episode. The sticker shock of $4 a gallon to Americans just recovering from the post-COVID inflation and tariffs hit now seems survivable.

Markets are now focusing on the economic upside from the $200B war, an economic win for a U.S. economy already on an upward path paved by tax breaks, reshoring, and AI spending excesses. They are now smelling the spoils of victory in the form of a return to $60 oil as well, once the Gulf tankers are allowed to resume sailing. At that point, the 'trumpets' will be virtually blaring. That's when you should 'sell, sell, sell'!

Why? Post-war euphoria will give way to new concerns at some point. The next battlefront will be in the capital markets, as they will be tasked with backfilling the gaping hole left at the U.S. Treasury. The low-hanging fruit of DOGE cuts now behind them, and huge Defence department costs, Bessent and Co. are facing surging deficits just as tax cuts start to kick in. Despite the recent feeble flight-to-quality rally, the Greenback should resume its weakening, further reducing foreign investor appetite for Treasuries. The Euro looks poised to rally to new highs here.

So a failed Treasury auction is not something that risk-takers want to see. As we saw in the Crash of '87, that won't be risk-friendly. And that's before the potential for a renewed Fed tightening cycle amid an overstimulative, inflationary fiscal backdrop. I'd be selling long bonds on any rally this year.

Those worries are for another day. Investors are back to the business at hand. The bull market is alive and well! Just stop overthinking it. So, as we bid the Leafs a good golf season and the Jays are breaking down like my 10-year-old car, I'm just happy to be back at my post, doing play-by-play on the greatest game I know - stocks!

Risk Model: 2/5 - Risk Off

The rally's velocity has already generated a risk-off signal in Canadian markets. Let's review the charts of the five risk model components for a reset of the risk backdrop:

AAII Bull/Bear Ratio

AAII Sentiment is locked in a trading range and recovering from the Iran shock. Should go green in this week's reading.

Copper/Gold Ratio

In a definite bull market now, as fiscal stimulus now adds to last year's rate-cutting push to metals prices. I'm still betting copper will outperform gold this year. It's the economy, stupid!

3 Month VIX

Volatility risks are subsiding nicely here. Didn't reach the Trump tariff peak despite the harsh rhetoric. He must be losing his touch.

TSX ETF - XIU

Two things I notice: The Canadian market is strong! It never corrected to the 200-day moving average, and the RSI and 200DMA indicators are already above their signal levels. The Canadian market performed better during the U.S. correction, driven by an energy stock rally. That is reversing now, and the U.S. market should do better than Canada in the short term. But the huge secular bear market for Canadian stocks relative to the U.S., in place since 2011, is over.

TSX Relative to S&P500