NFTRH; the Inflationary Reflation Theme Updated

Take the below as a ‘what if?’ exercise, as in what if long-term yields reverse in a brief deflationary turn?

Before yesterday I was prepared to raise cash further in non-precious metals positions (PMs have been in correction for half a year and are hedged) until I saw the 10 and 30 year yields begin to break out of daily chart bull flags (see 2nd chart below). The situation has been one of rising yields right along with the stock market, which is reflating at the instigation of the Fed’s monetary policy and the government’s fiscal policy laid on top of it.

As a side note, and speaking of the precious metals and the ongoing correction that could intensify, let’s remember that the PMs often lead. They led to the upside out of March and gold, silver and the miners could be leading the broader reflating markets to correction. Ref. yesterday’s update showing a new downside possibility for HUI, should it seek out our long watched target #2 in the 250-260 area. That would be a capitulation event, which the sector takes from time to time, even or especially in bull markets.

Two weeks ago NFTRH 637 introduced the theme that the 30 year yield (Continuum) was nearing a caution area at 2% (we’ll have extreme caution at 2.5%). I don’t think this kills the rally, but it is an area that could see some disturbance. Here is the monthly chart showing the yield bumping up toward 2%.

The daily chart, however, shows that the break up from the flag yesterday may have been a head fake (this post-March market has been filled with head fakes, hasn’t it?) and I don’t like that. In the short-term I’d have caution across most markets, but especially those in positive correlation with yields, like banks/financials, energy, resources/commodities and materials.

Looking ahead, if there is a market disturbance brewing in the short-term we’ll find out whether it is just routine or something worse if/when TYX drops and fills the gap and tests the SMA 50. If that is what happens it would be the slightest deflationary whiff within an ongoing rally. As already stated, at or around 2.5% we will likely go on full caution mode for a real deflationary event.

Bottom line

  • I don’t like that the 30yr yield head faked and is dropping this morning. It may be nothing or…
  • It may trigger a drop to the 1.7% area in a small whiff of deflation.
  • That would not necessarily end the rally, but could bring on market pressure and/or a routine correction, esp. in areas correlated to inflation and rising yields.
  • Later, at 2.5% +/- it will be time for caution, almost assuredly. There could be a first time for the Continuum (1st chart above) to break the red dashed line’s limits as the inflation genie gets out of the bottle. But historically speaking, we’d need caution regardless with the odds of deflationary failure outweighing a speculated ‘first time’ event.
  • The precious metals correction may be well ahead of broad markets and would be expected to bottom first and most intensely IF a correction starts in broader markets (this morning’s futures are at a routine pullback with not even the shortest caution markers, e.g. daily EMA 20, broken).