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RoboStreet – July 15, 2021
Inflation Hawks Fighting The Fed
To the extent the spike in inflation data is temporary is the biggest question being asked by investors today. The goal of the Fed is full employment and managing inflation with a target of 2%. How much stimulus is too much is also being widely debated. A lot of very smart economists and chief investment officers of the biggest Wall Street firms are far apart on whether inflation is temporary or structural.
From both the CPI and PPI reports released earlier this week, there is clear evidence that upward pricing pressure in the services sector is present. Historically, when inflation shows up in the services data, it’s not some short-term blip, but rather a trend. Fed Chairman Powell’s testimony to Congress this week showed his resolve to maintain QE while continuing to argue that inflation, though above its target, will cool.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
No matter what the inflation hawks may think, it is proving difficult to fight the Fed and the power they wield over fixed income markets. Treasury yields have worked lower over the past two weeks with bond investors not just looking for a safe parking lot out of uncertainty surrounding the delta variant and its potential impact, but also buying into the Fed’s narrative. Inflation data is rising while bond yields are falling. What a market.
From a technical perspective, the $SPY continued to make an incremental gain. The bank stocks and the rest of the reflationary stocks continue the sell-off with the exception of the Mega Cap technology stocks (AAPL). High Beta stocks also changed momentum to the downside (ARKK, WFH, IWM).
The $DXY has broken above $90.60 resistance and has confirmed its breakout. The next level of resistance at $93. The $TLT continued to trade higher and the next level of overhead resistance is at $150.
Based on the steep correction in the reflationary stocks, strong dollar, and overbought technology stocks, the market is due for a correction in July. The $SPY short-term support level is at $430, followed by $425. The SPY overhead resistance is at $440.
I would consider rebalancing the portfolio at this point to be more market-neutral. The second wave of the sell will continue for the next 2-4 weeks. Market corrections are never a one-way trade.
Based on our models, the $SPY can pull back 5-10% from the all-time highs in the next 2-4 weeks. Based on our models, the market (SPY) will trade in the range between $405 and $440 for the next 2-4 weeks.
What has taken shape in short order is the reflation trade has hit the pause button. The rally in bonds and a broad pullback in most commodities is driving downside pressure in the small caps, banks, industrials, and energy stocks. While this rotation is prevalent this week, how long it will last is fully up for debate, but fighting the tape is not a good idea.
Our AI models are waving a caution flag for these sectors. The Seasonal Chart for the Energy Select Sector SPDR ETF (XLE) shows three of four time periods flashing “Lower” over the next 50 days. Shares of XLE have breached their 50-day m.a. this week with further downside looking in the cards.
When looking at the iShares Russell 2000 ETF (IWM) that represents the small-cap universe of stocks, the $220 level has been a key area of support. Once again, this level is being violated, which opens the way for follow-on selling pressure and should be avoided for the time being.
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Our track record goes back over three years and we’re looking forward to another three years of steady gains and consistent wealth-building of RoboInvestor portfolios. With diverting Fed policy, future increases in taxes, big swings in commodity prices, regulatory changes, and geopolitical risks, there is no better time than the present to put the power of AI to work in one’s portfolio. Make an intelligent decision today and join us at RoboInvestor– making the second half of 2021 a smooth and profitable ride.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
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