Welcome To The “Melt-Up”

In this past weekend’s newsletter, I discussed the potential for a breakout by the markets to “all time” highs during a holiday shortened, and light trading, week. On Monday, not to be disappointed, that expectation was met. “The good news, as shown in the next chart, is the market was able to clear that downtrend resistance this week and turn the previous “sell signal” back up.  As suggested previously, it is not surprising the markets are pushing all-time highs as we saw on Friday.” But what about after that? “Importantly, with next week being a light trading week, it would not be surprising to see markets drift higher.   However, expect a decline during the first couple of weeks of December as mutual funds and hedge funds deal with distributions and redemptions. That draw down, as seen in early last December, ran right into the Fed rate hike that set up the sharp January decline.” As I have noted above, there are many similarities in market action between the “post-Trexit” bounce, “Brexit” and last December’s Fed rate hike. I have highlighted there specific areas of note in the chart above. “As with ‘Brexit’ this past June, the markets sold off heading into the vote assuming a vote to leave the Eurozone would be a catastrophe. However, as the vote became clear that Britain was voting to leave, global Central Banks leaped into action to push liquidity into the markets to remove the risk of a market meltdown. The same setup was seen as markets plunged on election night and once again liquidity was pushed into the markets to support asset prices forcing a short-squeeze higher.” So, with that breakout, I am increasing equity risk exposure to portfolios.  However, I am doing so with an offsetting hedge by adding exposure to interest rate sensitive sectors and beaten down opportunities. The reason for those hedges is due to the combined current backdrop of a sharply higher dollar and interest rates which have historically been the ingredients for rather nasty corrections. The chart below is the 60-day moving average of total 60-day change of both interest rates and the dollar.  In other words, I have used a 60-day moving average to smooth out the volatility of the 60-day net change in the dollar and rates so a clearer trend could be revealed. I have then overlaid that moving average with the…

Source: ZeroHedge

Welcome To The "Melt-Up"

Share This Post