“Transitory Inflation” Gains Credibility with Wall Street

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  • Summary Analysis: Even though the market ended the week with an impressive two-day rally underscored by the superior performance of large-cap tech and small-cap stocks, it was not enough to prevent a weekly loss. In lieu of this, a few new insights were learned about the character of this market or its cycle:
  1. Equity and Bond investors are accepting the Fed’s thesis on “transitory inflation” and coming to terms with the eventuality of higher interest rates once the economy rebounds (at least for now).
  1. The Fed is zealously committed to maintaining its accommodative policy, regardless of inflationary data, until the economy regains full employment. While it appears to be completely transparent, this is not the case because it consistently engages in a pattern of double-talk whenever key economic data is released. Actions speak louder than words, but things can suddenly change since some of its members have continously forewarned the market of the need to adopt a more hawkish policy. Whenever it does decide to change policy or shift its bias towards tightening, investors cannot say they didn’t tell them so.
  1. “Transitory inflation” is taking its toll upon consumers and has dampened their outlook. On the other hand, investors have not completely lost their enthusiasm for Consumer Discretionary stocks. Their relative underperformance vs Consumer Staples may have bottomed and it may be premature to underweight this sector.
  1. Cryptocurrencies, whether one likes or believes in them, are a legitimate asset class and alternative store of value, albeit certainly volatile.
  • Equities:
    • US Markets: The SP-500 (SPY) and Dow 30 Industrials (DIA) regained the support of their 50-day moving averages. However, it was the Russell-2000 (IWM) and Nasdaq-100 (QQQ) which led the markets today on much lighter volume relative to the blue-chip indexes
    • Leading Sectors: Energy (XLE); Technology (XLK); and Communications (XLC).
    • Lagging Sectors: Consumer Staples (XLP); Utilities (XLU); and Healthcare (XLV).
    • Int’l Markets: All the major international markets covered in this report were positive, but Europe (VGK) and Latin America (ILF) distinguished themselves in performance and higher volume.
    • Volatility: The VIX (VXX) has given back essentially all but @ +5.08% of its gains for the week and closed below its 50-day moving average. Volume was still quite high and indicative of accumulation.
  • Large-Cap Volume Surgers:
    • Marathon Petroleum (MPC): +2.21% on 393% volume surge
    • Walt Disney Co (DIS): -2.60% on 229% volume surge
    • Nortonlifelock (NLOK): +2.84% on 158% volume surge
    • American Well Corp Cl A (AMWL): +16.52% on 98% volume surge
  • Small-Cap Volume Surgers:
    • Fluor Corp (FLR) +1.11% on 437% volume surge
    • AMC Entertainment Hldgns (AMC) +1.64% on 168% volume surge
    • Plug Power Inc (PLUG): +11.93% on 117% volume surge
  • Market Moving Events:
    • Economy/ Consumer: Apr-2021 Core Retail Sales m/m @ -0.8% vs estimates @ 0.7% and prior @ 9.0%; and Retail Sales m/m @ 0.0% vs estimates @ 1.0% and prior @ 10.7%. The previous month’s data is distorted due to federal stimulus and should be discounted as a fundamental anomaly.
    • Economy / Consumer: May-2021 Consumer Expectations @ 77.6 vs estimates @ 85.0 and prior @ 82.7; and Consumer Sentiment @ 82.8 vs estimates @ 90.4 and prior @ 88.3.
    • Economy / Inflation: Apr-2021 Export Prices m/m @ 0.8% vs estimates @ 0.6% nad prior @ 2.4%; and Import Prices m/m @ 0.7% vs estimates @ 0.6% and prior @ 1.4%.
    • Economy / Manufacturing: Apr-2021 Industrial Production m/m @ 0.7% vs estimates 1.0% and prior @ 2.4%; and Industrial Production y/y @ 16.449% vs prior @ 1.04%.
    • Economy / Inventories: Mar-2021 Business Inventories m/m @ 0.3% vs estimates @ 0.3% and prior @ 0.6%; and Retail Inventories Ex-Autos @ 0.6% vs prior @ 0.6%.
    • Central Banks / US: Cleveland Fed Presdident Mester made it clear that she supports the current Fed stimulus initiatives and that “this is not the time to be adjusting anything on monetary policy. It is a time for watchful waiting, seeing how the recovery evolves.”  In what is becoming a formulaic script, this statement was balanced with a more hawkish stance from Dallas Fed President Kaplan who expressed concerns about imbalances, notably in the housing market, and is of the opinion that the Fed should be reducing its bond purchases “sooner rather than later.”
    • Commodities / Energy: Weekly Baker Hughes Oil Rig Count @ 352 vs prior @ 344; and Total Rig Count @ 453 vs prior @ 448.
    • Earnings / Positive Surprises: n/a.
    • Earnings / Negative Surprises: Although Disney (DIS) beat earnings @ $0.79 vs estimates @ $0.26, their subscriber membership disappointed analysts, i.e. 103.6mm vs estimates @ 110.3mm.
  • Bond Rates: The 10-Year Treasury yield closed @ 1.6 (-0.03bps / -1.98%). As a result, the 20-Yr+ Treasury ETF (TLT) initiated a bullish reversal and advanced +0.94%.
  • Currencies: The US Dollar (UUP) continued its bearish reversal to resume its downtrend, while the Euro (FXE) confirmed support at the lower range of its bullish channel. The Yen (FXY) continues to consolidate.
  • Cryptocurrencies: Yesterday’s extremely high volume confirmed exactly what I suspected which is savvy HODLRs and traders were accumulating shares of Grayscale Bitcoin (GBTC) and Ethereum (ETHE). Cryptocurrencies increased sharply in price and ETHE continues to lead with respect to buyer demand.
  • Commodities: Both Gold (GLD) and US Oil (USO) gapped up and are now testing restisance as they each are working on the right side of a cup-with-handle formation and set up for a classic bullish breakout or sharp reversal. The fundamentals favor more upside: a) transitory inflation under an accommodative Fed monetary policy benefits GLD; and b) the speed of the economic recovery since the massive scale of Covid19 vaccinations should increase the demand for crude oil.
  • Real Estate: Postpoining any rate increases may encourage hesitant buyers, especially since economic recovery and job openings are positive catalysts. In addition to this, an increase in commercial transportation will free up supply bottlenecks and help alleviate inflated prices for building materials. Homebuilders ETF (ITB) and Residential (REZ) are under accumulation and may find continued support near their 50-day moving averages.

ETF Daily Market Performance Summary: 14-May-2021

etf daily market summary for stocks, bonds, currencies, cryptocurrencies, commodities, real estate, and equity sectors
Click to enlarge

Market Diary: 14-May-2021

market diary summary for NYSE and Nasdaq exchanges: advancers, decliners, new highs and new lows, plus mega-cap market breadth
(Click table to enlarge)

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