Tuesday night we reminisced that on February 5th I wrote in a post:
“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 the 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 yesterday.
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 as 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...no interest rates to collect.
Spend it, very likely. Now multiply that not just by the 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!
Key Levels
S&P 500 (SPDR S&P 500 (NYSE:SPY)) 299.42 resistance with 290 support
Russell 2000 (iShares Russell 2000 ETF (NYSE:IWM)) 128.50 support with resistance 136.85
Dow (SPDR® Dow Jones Industrial Average ETF Trust (NYSE:DIA)) 240.50 support with resistance at 247.67
NASDAQ (Invesco (NYSE:IVZ) QQQ Trust (NASDAQ:QQQ)) Seems determined to go to match if not make new highs. 225 support now
SPDR® S&P Regional Banking ETF (NYSE:KRE) (Regional Banks) Back over the 50-DMA if holds 34.00
VanEck Vectors Semiconductor ETF (NYSE:SMH) (Semiconductors) Gap to fill to 144.96. 135 support
iShares Transportation Average ETF (NYSE:IYT) (Transportation) 155.60 resistance 143 support
iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) (Biotechnology) 131 support to hold
SPDR® S&P Retail ETF (NYSE:XRT) (Retail) 38.50 to clear
Volatility Index (iPath® Series B S&P 500® VIX Short-Term Futures™ ETN (NYSE:VXX)) Inside day.
Junk Bonds (SPDR® Bloomberg Barclays (LON:BARC) High Yield Bond ETF (NYSE:JNK)) 100 cleared and has to hold
LQD (iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD)) 132 April highs