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Navigating The Tidal Wave Of Liquidity

By Monica KingsleyStock MarketsApr 08, 2021 11:59AM ET
www.investing.com/analysis/navigating-the-tidal-wave-of-liquidity-200571986
Navigating The Tidal Wave Of Liquidity
By Monica Kingsley   |  Apr 08, 2021 11:59AM ET
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The S&P 500 moved marginally higher in spite of its short-term very extended position, powered by liquidity. Credit markets were hinting at deterioration, the yen carry trade I talked about a week ago has run into a brick wall as viewed by the USD/JPY exchange rate reversal – but stocks didn't listen, and their market breadth indicators are actually quite healthy.

We're still in the rare constellation I discussed two days ago – Treasury yield moves are exerting no real pressure either on value stocks or technology, including heavyweights, which are picking up the tech upswing slack. Microrotations still pointing higher are the name of the game, on the wave of infrastructure bill expectations as well.

Still, the risk-reward ratio for the bulls is at unsavory levels in the very short run even as the longer time frame perspectives remain really bright. Consider these points I made yesterday:

(…) we have seen quite a record number (around 95%) of stocks trading above their 200-day moving averages, which is similar to the setup right after the post-dotcom bubble bear market 2002/3 lows, or 1-2 years after the bull market run off the Mar 2009 lows. Hard to say which one is more hated, but I see the run from March 2020 generational low as the gold medal winner, especially given the denial accompanying it since.

Gold kept its run above $1,740 intact and regardless of the daily weakness in the miners – should that one be repeated more consistently, it would become worrying for the bulls. Looking though again at the USD/JPY chart, I'm increasingly optimistic that the currents working against the king of metals, have turned. That's because whenever the yen, the currency perceived by the market place as a safe haven, strengthens, gold tends to follow its cue. And that's where we are now. The precious metals run to the key $1,760s or even better above $1,775 is approaching, and has already sent my open gold position solidly into the black.

The soft patch I cautioned against at the onset of yesterday's session, has materialized in the miners, and might be very well over by today's closing bell. Yes, I look for mining stocks to reverse yesterday's weakness even in the competition for money flows with the S&P 500 holding up gained ground.

Let's move right into the charts (all courtesy of www.stockcharts.com).

Inflation Expectations

TIP-TLT Ratio Daily Chart.
TIP-TLT Ratio Daily Chart.

The Treasury inflation protected securities to long-dated Treasuries (TIP:TLT) ratio appears ready to move upwards, and the rising yields are clearly doubting its recent dip.

Gold In Spotlight

Gold Daily Chart.
Gold Daily Chart.

Gold miners compared to gold, don't paint a daily picture of strength. Jumping to conclusions on account of the hanging man formation in gold, would be premature though.

Gold Weekly Chart.
Gold Weekly Chart.

Zooming out, the weekly gold chart with overlaid copper to 10-year Treasury yield, paints a picture of (bullish) turnaround and decoupling. Gold has been clearly attempting to move higher lately, and that will reflect upon the precious metals complex positively as it undergoes its own rotations lifting gold, silver or miners at different stages and magnitudes.

Summary

Miners moving higher again is the first step to power gold upwards sustainably again, but the shifting currency winds would help here as the strengthening yen would facilitate beating the next major set of resistances above $1,760s.

The S&P 500 is likely to keep consolidating gained ground, and (shallow) bear raids wouldn't be unexpected here – in spite of the strong market breadth. We're witnessing VIX trading well below 20 for four sessions in a row while the put/call ratio has risen to the approximate midpoint of its usual range – the bull market is intact, and a breather wouldn‘t be surprising here.

Navigating The Tidal Wave Of Liquidity
 

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Navigating The Tidal Wave Of Liquidity

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Comments (7)
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Inflation is a sudden, sharp increase in the money and/or credit supply. Prices rise where inflation enters the market. The Fed is buying a variety of markets, including the stock market. The rise is the stock market is due to the inflation entering the market. It has nothing to do with a healthy economy. The real economy is a dirty toilet. The toilet will have to be flushed soon.
Robert Flores
Robert Flores Apr 09, 2021 12:44PM ET
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My thoughts, we only need moderate inflation and low interest rates for pms to keep going higher and higher- copper is a no buy for now- its upside is limited as inventories recover- long term i do buy copper minning stocks like RIO as they pay attractive dividends and will outperform over the next 5 to 10 years and beyond
Pamp Ett
Pamp Ett Apr 08, 2021 8:56PM ET
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Totally manipulated through futures contracts. Flat every cash session, yet we have to pay up to buy thanks to our pajama friends.
Kevin McCarthy
Kevin McCarthy Apr 08, 2021 5:01PM ET
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great article! What's your thoughts on PPI tomorrow? I think we will see it beat expectations, but I also expect the dollar to selloff into that. the reason being is PPI beating expectations just reinforces the hyperinflation theories at this point.
Monica Kingsley
Monica Kingsley Apr 08, 2021 5:01PM ET
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Thank you Kevin, I agree with your expectations, spot on. Just put hyper into brackets for now.
Randall Wagner
Randall Wagner Apr 08, 2021 2:22PM ET
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MK thank you very much. What is your opinion of investing in CEFs? Do you think that the increased risk (there are a number of risk issues that I am aware of) is worth the additional profit? The ones I've researched seem to be of quality fund managers.
Monica Kingsley
Monica Kingsley Apr 08, 2021 2:22PM ET
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Hi again Randall, I prefer having full control over investments personally, transparently. I question the additional profit point as a given, it's no certainty, very far from it. There are good and worse moments in every fund manager's years, and the same goes for traders or other inspirations you might act on. Please do mail me your considerations and ideas so that I know what precisely you're thinking about.
Richard Clinton
Richard Clinton Apr 08, 2021 12:32PM ET
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Thank you!
Monica Kingsley
Monica Kingsley Apr 08, 2021 12:32PM ET
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I thank you!
Allen tran
Allen tran Apr 08, 2021 12:13PM ET
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Very good picture
Monica Kingsley
Monica Kingsley Apr 08, 2021 12:13PM ET
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Thank you, including that bit of gains happening in the overnight session.
 
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