There have been a lot of changes in the trading models over the past 2 weeks, but the basic tenor from this perspective is that hard assets should outperform paper assets.
Let’s start with Treasury bonds. Yields are headed higher, and higher yields can easily throw a monkey wrench into the equity rally. Yields are heading higher not in response to growth but in response to inflationary pressures. Remember, this is a liquidity driven equity rally, and there is no reason to think otherwise. Crude oil, copper and agriculture commodities are lagging equities especially when you consider these assets are below their 2011 highs. I suspect these issues will play catch up. Dollar weakness should help to buoy commodities.
We remain bullish on equities but rising yield pressures are generally a sign of being late in the rally. Predicting an end to this rally is foolish, but prices are likely to falter as yields rise. Honestly, if you overstay your welcome in equities you could be the victim of a sudden draft. This is not a prediction but just a warning. This is the risk you take. Would I put new money to work in equities? No. A pull back is required, and even then, I would keep my time frame short or sell at the upper end of the trading range. This is looking more and more like an intermediate term market top, and last year, prices consolidated in a tight range for 6 months before dropping 20% over 4 weeks. If already long equities, I would stay long as the trend still remains your friend.
Our models are also bullish on crude oil and copper (i.e., base metals), and these assets generally rally late in the cycle. Agriculture assets seem attractive as well.
I am neutral on gold as long as interest rate pressures mount. Technically and fundamentally, a period of consolidation is likely.