Hello traders
I hope you’ve all had a good week.
It has been a challenging one for equity investors following many months of gains. The key driver has been the sustained rally in interest rates which is challenging the elevated valuations of growth stocks and causing some investors to question whether the entire asset class may be at risk. The move in bonds is ultimately predicated on the ever-closer reopening of the economy and perceived threat of inflation as a result of Biden’s $1.9BN stimulus. Rising crude oil prices spurred by the recent extreme weather in Texas have also turbo charged this reflation trade, as I have discussed in recent posts.
There has certainly been a lot of debate in the media about how best to position for what comes next, and it should remind us of the importance of sticking to our process to help reduce the volume of noise and exercise better judgement. Whilst the rotation beneath the surface from growth to value stocks has been one of the most violent on record, it would be foolish to lose sight of the fact that the S&P 500 is down a mere -3% from a record high – set just last week! Furthermore, the market is still up by a similar amount this month, having rallied hard in February.
Our Checklist process pointed to gains for equities this month, and has proven to be correct despite the selling in the past few days.
We did note a weakening in the score on the previous month, but took confidence from the confirmation provided by positive scores in other correlated Checklists, such as our Market Risk Checklist.
This suggested that risk markets in general should be supported by a ‘risk on’ tailwind. Although it may seem a bold position now, when the score was updated at the beginning of the month (January 27th, to be exact) the industrials / consumer staples sector ratio was down at 1.30 and well off the previous high. However, the ‘riskier’ industrials have since outperformed the ‘safe haven’ consumer staples by nearly +9% - a great trade further supported by the reflation tailwind.
I provided a full update on these trades, plus the likely consequences of a steepening yield curve, and how to position for it, in this week’s Trading Club video.
We will be updating our Checklist scores next week with a brand new report for the month ahead. To learn more about our methods, and join me for more analysis in real-time, check out our MDT course and Trading Club pages where you can preview everything that we cover.
In the meantime, why not head over to our YouTube Channel for our latest FREE videos which I will be bringing to you each week in 2021! As there’s no charge for this content, it would be great if you could support the channel by leaving a comment and subscribing.
Watch this week’s video here: YouTube Channel
Have a great weekend,
James
Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information.
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