In case you missed it, Tuesday was all about the reflation trade. It seems that all of a sudden everyone is on board with the commodity supercycle. Oh, yes, that's the story.
I am not saying we won't see one, but remember when oil went negative in April? The hysteria! Or even in October, when we heard how "ESG" -- environmental, social and corporate governance investing -- was the only way to go and no one needed to own energy stocks, remember? Oil was $35 at the time. Now it is $60. My point is: It's not as though folks are discovering the reflation trade when oil is at $35 or even $40 is it?
Or, maybe that's why copper stocks, namely Freeport-McMoRan (FCX) has gone from $5 to $33 in a year. It has doubled since September.
So why did everyone discover the reflation trade on Tuesday? Well, probably because bonds blew up. Well, they fell apart, which pushed rates up. And it is sure consensus now that rates are going higher because you know, the commodity supercycle.
The chart of the interest rate on the 10-year has a bit of resistance here from a prior high, but you should also be aware that the Daily Sentiment Index (DSI) for Bonds has finally come down to a level that is bordering on too bearish. It is now $15. I have never seen the DSI for bonds get to single digits (I'm sure it has, but not in the time I have been following it). As a reminder, single digit readings are extreme and mean it is time to go the other way. I would not look for higher rates until there is a bounce in bonds (rates pullback). I would look for rates to pullback in the coming days.
As for stocks, they rallied, but couldn't get going. I think it's because they are overbought. Statistically, breadth was right in line with the decline, maybe even better than the decline in the indexes, because net breadth was only negative 200 on the day. And up volume on the New York Stock Exchange was 60% of total volume. Nasdaq saw 65% of the volume on the upside.
But let's go back to the McClellan Summation Index. It has been my contention that we were more apt to see a rollover/pullback that was similar to October. By that I mean we would not see the indicators roll over first, as we typically do, but rather the indexes could peak first and the Summation Index would roll over either contemporaneously or just after.
The Summation Index will stop going up if net breadth (advancers minus decliners on the NYSE) is negative 200 or worse. Anything much more and the Summation Index ought to roll back over. And the Summation Index tells us what the majority of stocks are doing.
In sum, while statistics and indicators were not anything to write home about on Tuesday -- they didn't change much -- I still think we're overbought enough to pullback this week.