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Key Points

  • The Rotation Trade May Have Run Its Course…
  • ...Copper / Gold Ratio Rejected at the 200-Day Moving Average
  • The Inflation Thesis is Beginning to Play Out as Well
  • Near-Term Conditions Call for a Bit of Caution
  • Too Far, Too Fast in the Precious Metals Space?

Action Plan

The odds of a stagflation environment are continuing to rise in our opinion. Over the past few weeks/months we have made this view clear by looking at both sides of the coin, growth and inflation. Over that time, the evidence continued to mount in favor of our view. This is likely to have impacts on different asset classes which will determine the best type of portfolio construction. Our thoughts here remain the same in that we look for growth to lead value in the equity space with a leaning toward large caps. Precious metals will likely continue to be a solid store of value as inflation erodes the purchasing power of our currency, a theme that is playing out around the globe.

Being discounting mechanisms, markets have already begun to favor these trends and we have been writing about them for some time. As such, there is no change to our view. What has changed, however, is that the market appears to have corrected some of the froth in the growth/value theme and is now offering another opportunity to establish/add to the theme. The “rotation” trade that so many are hoping beyond hope will pan out took place as copper was rallying relative to gold (green box). Now, the ratio has met and been rejected from the declining 200-day moving average, setting the stage for the reemergence of the growth theme, just as QQQ is oversold based on our indicator.


The SPDR S&P 500 ETF has a Neutral Chaikin Power Gauge ETF Rating (down from bullish last week). The fund is above the rising long-term trend line which is in the support zone that we have been highlighting between $300 - $310. Last week, SPY tried to break through the top of the recent range but has been turned back. The trend from the March 23rd lows remains in place but there is potential for more choppy trading/weakness in the near-term.

As always, the better information is under the surface. Last week, we began to opine that the rotation trade may be coming to an end and that view remains in place this week. As the SPY and IWM have Neutral ETF ratings, the Invesco QQQ Trust continues with a Very Bullish rating. and it remains in an uptrend. The weight of the evidence continues to support QQQ outperformance (this does not mean they will not go down if there is a leg lower in the equity market). As we noted above, the ratio of copper to gold, that has been so important in shaping our strategic market view, is beginning to move lower once again.

At the same time, the inflation portion of our thesis is now beginning to play out as well. Looking at the chart of the five year breakeven inflation rate, we can see a spike of nearly one percentage point over the past few months as the fiscal and monetary stimulus have contributed to the weakness of the US dollar and are now beginning to erode our purchasing power.

Look no further than the utter collapse of the US Dollar over the past few weeks. Admittedly, I had been in the bullish camp on the greenback under the premise that while we were doing all that we could in the US to weaken the currency, at least we were not alone. The rest of the major economies around the globe were doing all that they could to weaken their own currencies. I was wrong in my bullish dollar view and was made aware of that when the Invesco DB US Dollar Bullish ETF (UUP) broke the key $26 level. While a near-term bounce can’t be ruled out, the trend in the dollar appears to have shifted to one that is bearish.

As the US and others compete in a seeming race to zero as it relates to currencies, we can see the impact in the areas of the market away from equites where we have been and remain bullish, the precious metals. Over the past few weeks/months we have highlighted the strength in gold, silver and the miners. We remain bullish on these themes from a trend perspective but would not chase current strength as the products are extended to the upside as we can see in the chart of GLD, the SPDR Gold Trust.

The Near-Term Could Be Choppy

We are open to the idea of continued choppy trade in the near-term as both the SPY and IWM now have Neutral ETF ratings. This does not alter our more bullish view from a trend perspective which remains in place as long as SPY holds important support in the 3,00 - 3,100 range.

Dan Russo, CMT
Chief Market Strategist


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