OVERBOUGHT (MEA CULPA) AND FIXED INCOME

 

While I haven’t wavered in my belief that the intermediate-term (non-trading) internal and external equity market indicators have been supportive of higher equity prices, I was wrong last week in thinking that the odds favored some type of near-term equity market consolidation or pullback. I still believe that is the case, but the timing of the statement was clearly early.

To this point, I am reminded of a wise statement made by a former colleague relative to “overbought” conditions and also “extreme” bullish sentiment readings. To paraphrase him:

“It’s a reversal down from such conditions that should be taken seriously and acted upon, not specifically the isolated conditions themselves.”

In other words, when the equity market’s current, near-term overbought condition (and extreme bullish sentiment readings) turns down, likely due to a period of selling, then risk tolerance strategies and levels should be discussed and implemented. This is especially the case if non-trading internal equity market indicators (i.e. domestic and global A/D Line) deteriorate/diverge, which, at this juncture, they haven’t.

Switching gears…

In early December I highlighted the theme that Inflation Protected Fixed Income instruments were outperforming U.S. Treasury Fixed Income instruments. Since then, many fixed income participants have jumped on this theme, tying it to inflation/inflation expectations. Another intermarket relationship—in this case using equity market instruments—that currently supports this theme is the relative strength relationship between the North American Natural Resources ETF (theoretically does better during inflationary times) and the Consumer Staples Sector Fund (theoretically does better during a deflationary environment).

ige versus xlp.JPG

Finally, I highlighted the chart below in our January Global Macroeconomic and Technical webinar. Consistent with the observations above and although a shorter-term chart than what was highlighted in the webinar, I feel it bears repeating here.

commodities.JPG

Investment implications: Based on your fixed income objectives, and tolerance for risk: 1) Look for alternative fixed income-related strategies. 2) Swap some U.S. Treasury fixed income instruments for inflation-protected instruments. 3) Reduce some U.S. Treasury fixed income instruments and/or swap them for alternative fixed income-related strategies.      

On behalf of the team at Day Hagan Asset Management, thank you for allowing us to be part of your business.

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 01.15.2018. Chart sources: Stockcharts.com.

Print Copy of article: Day Hagan Tech Talk January 16, 2018 (PDF)

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