Reflation

Navigator Algorithms - 94% Cash / 3% XLF Calls / 3% XLE Calls

S&P 500 Index Futures (half-day candles)
with Navigator System Status Labels

In the 2021 outlook video, I emphasized the inflationary consequences of the deluge of money-supply ripping through the Federal Reserve System. Nearly 40% of all U.S. dollars in circulation were printed in the last 12 months.

I will skip discussing my seething anger anticipating the bubble that will eventually burst. Suffice it to say that when we finally pay the piper, the Pandemic will seem like a walk in the park.

For now, inflation and growth expectations drive interest rates, which are now responding to the call of their inflation masters. Hence, the 30-year treasury yield is bumping 2%, while the 10-year seemingly has conquered the 1% level.

As oil continues its climb and higher rates reward the financial sector (mainly banks), I am looking to add to our XLE and XLF positions on dips. Because the market still has considerable influence on the sectors, I don’t mind exiting to cash on expected market turbulence. Make no mistake; managing market risk is paramount at these levels. A 10% correction is just around the corner, and waning market momentum is flashing yellow at this writing.

Crude Oil

Markets can tolerate rising rates (at these low levels), as long as Federal Reserve policy doesn’t change significantly. Rising rates and the steepening yield curve (long rates – short rates) also indicate growth ahead – which is good for earnings. Open borders will tame the inflation beast as wages, once again, will be hammered by global migration serving our glorious elites and the demonic Great Reset. So I am not concerned about the negative aspects of inflation yet, just how to benefit from the immediate turn.

10-Year U.S. Treasury Yields (Rates)

Additionally, I am focusing some attention on international ETFs for the first time in a long, long time. The weakened dollar has put the emerging market economies back on a firm footing (their debt is denominated in U.S. currency). This time, the emerging markets do not have to worry about China pegging to the U.S. Dollar, as China would just as soon see the U.S. topple under its own largesse and political strife. Of course, they could change their mind now that China has installed their own regime to run the U.S. government.

Perhaps the most perplexing issue on my radar is Gold. I am showing a long-term peak in the metal based on Hurst’s Nominal 9-year cycle:

Gold

Of late, Gold has been correlating with U.S. Treasury prices, so perhaps the peak is related to the “Risk-On” nature of the current investing climate. Also, there is a clear division in outcome expectations of the financial bubble busting. Some experts expect runaway inflation, while others expect another deflationary spiral. Perhaps Gold is picking deflation as the winner, or maybe my forecast is just plain wrong. Time will tell.

If Gold is peaking, I look forward to building my coin collection in the decline. The more, the better given worst-case forecasts regarding the mounting Global Debt Crisis and the severe economic decline that may surely follow.

Today's Plan

The Navigator Market Algorithms are in short mode on the 195-minute (half-day candle) chart, as can be seen above. Moreover, momentum has declined on each rally loop of the chart. In attempting to conquer and hold 3900, it is not unusual to see some sputtering, but I still see high probability of a liquidation break soon.

Looking specifically at today’s session, the overnight low looks weak, leaving the potential for a sustained move back below 3900. Should a more significant liquidation break get underway, signposts start sequentially with yesterday’s low around 3887.25, on to the untouched points of control starting with 3880, 3850, 3827, and the top of the gap at 3799. Obviously, I would not expect traveling much below the ’50 handle in a single day on a liquidation break.

Should prices firm, note the spike that is at the upper end of yesterday’s distribution. Acceptance within the spike, especially after holding the overnight low and failing to break, would confirm still higher prices ahead and signal that the market is not ready to break.

As always, stay tuned.

A.F. Thornton