Tuesday night, we reminisced that, on February 5th, I wrote in a blog, "Although the last couple of days brought back euphoria into the market, with volatility hanging tough, one should be prepared for anything."
That sentiment remains true right now.
With volatility holding recent lows while NASDAQ gets closer to all-time highs and the S&P 500 inches closer to 3000, complacency and euphoria are risk on terms. Yet, as millions take off their masks and begin to congregate for the long Memorial Day weekend ahead, I only become more convinced that the stagflation theory will take shape once the summer season officially begins.
Stagflation is risk off.
The Fed minutes came out today. Highlights of the FOMC:
- "To support the flow of credit..., the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning..."
- "In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations.... The Committee....is prepared to adjust its plans as appropriate."
Will this ultimately keep equities in rally mode? Uncertain. Could it ignite stagflation? The economy is under siege while the cost to borrow money is virtually nil.
Wait, there's more. Out of Germany today: Germans paid to borrow as negative rates reach consumers.
If the banks are paying you to borrow money, what might you do with that money? Save it? Doubtful - there's no interest rates to collect.
Spend it, very likely. Now multiply that not just by number of people globally, but also by businesses and governments.
That is stagflation. Spending soars while supply dwindles. Hence, consumer prices go up with the rising demand. The economy still stagnates and voila - stagflation!
On another note, besides writing, I've been busy talking. Here are two links. The first is an interview with Jackie Pang from the Chinese TV station Phoenix TV - click this link to watch.
The other is today's installment of Your Daily Five, presented by me and hosted by StockCharts TV. Watch it below:
- S&P 500 (SPY): 299.42 resistance with 290 support
- Russell 2000 (IWM): 128.50 support with resistance 136.85
- Dow (DIA): 240.50 support with resistance at 247.67
- Nasdaq (QQQ): Seems determined to go to match, if not make new highs. 225 support now
- KRE (Regional Banks): Back over the 50-DMA; if holds, 34.00
- SMH (Semiconductors): Gap to fill to 144.96.135 support
- IYT (Transportation): 155.60 resistance, 143 support
- IBB (Biotechnology): 131 support to hold
- XRT (Retail): 38.50 to clear
- Volatility Index (VXX): Inside day.
- Junk Bonds (JNK): 100 cleared and has to hold
- LQD (iShs iBoxx High yield Bonds): 132 April highs
Mish Schneider
MarketGauge.com
Director of Trading Research and Education
