Up until the end March of this year, small and economically sensitive stocks lead the market. Value beat Growth stocks. Yields of the 10-year and 30-year US Treasuries rose. The US Dollar rose. Since then, mega cap stocks beat large, large beat mid cap, mid cap beat small cap and small caps are lagging. Is the reflation trade over? Is this an inflection point where Growth reasserts leadership over Value? Since the end of March, asset classes seemed to have gone in reverse.
We see that yields on US Treasuries were increasing at a rate above a key measurement. Too far, too fast. Yields have since moderated, having declined to rising support, i.e., the longer trend is still up. The modest decline in yields is showing up in the US Dollar which has declined also - again to rising support. Perhaps recent Fed-speak helped soothe the markets enough for the market to temporarily suspend concern over the Biden's administration massive fiscal and economic stimulus programs. Is the reflation trade actually be reversing back to the former large cap growth paradigm?
Given our analysis and interpretation of US Treasury yields, acceleration of economic activity in a coming post-Covid environment and added Government stimulus, we believe there is considerable risk of increases in rate of inflation as the year progresses. While this view is subject to change, we see the market gaining on actual economic expansion rather than by attempts by the Federal Reserve to control interest rates. The all-powerful bond market "vigilantes" will sniff out any hint of inflation and drive rates higher.
All US equity indices, particularly mega cap, strengthened and remain strategically Bullish. Emerging Markets flashing caution. China continues Bearish trend. Europe slightly lagging S&P 500.
Equity Styles: While underlying trend favors Large Cap Value, its strength vs. Large Cap Growth has weakened significantly. Small caps now under performing vs. large caps.
Ranked Sectors: Trend leaders - Transportation (an Industry Group), Financials, Energy, Communication Services, Industrials; Laggards - Real Estate, Staples, Health Care, Utilities.
The 30-year US Treasury Bond Yield rose to 2.347%; the 10-year Note Yield rose to 1.675%. Trend lines of each are up. Yield curve spread dipped to 1.51. The 2yr Yield is inching up.
The Australian Dollar is on Bear Alert, Euro and Yen in Bearish trends, British Pound in weakening Bullish trend. US $ strategically Bullish but fell slightly testing 26wk support. The US Dollar slipped to 92.14 from 92.60 after breaking to upside from a base-building (since December) pattern. Gold is Bearish, building a base since March 8.