History Tells Most Everyone Don’t Fight The Fed But The Equity Bulls Are Fretting Don’t Stop The Dance — What Fixed Income, Currency & Commodity Markets Are Telling Us

For a transitory moment the financial markets have gotten in synch and are rallying in the same direction, masking the inherent contradiction that was more apparent before yesterday’s inflation print. Today’s producer inflation print is furthering this all-in rally and setting us up for a final push in the melt-up and the inevitable and predictable reversal of that in short order. The volatility risk premium points to a higher market over the next few days, while my technical reading of key stocks in the S&P 500 is bullish. Yesterday's cross-asset action brought several positive factors for US stocks. Copper and oil charts are signifying global growth. The action in major currencies indicates the $US is weak. The US yield curve is falling and in the current context that is bullish. But there was also one negative factor across global asset classes. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to rocket over the next few days toward 4600 before correcting hard.

Today’s PPI report gives substance to the bullish thesis of expanding profit margins after a mild earnings recession, but another key to the thesis contradicts this, namely a weakening US dollar. The bulls need a rally in FOREX and a corresponding drop in the dollar to counter the negative liquidity effects of central bank tightening (across the world but for China), but a weak dollar will resurrect commodity prices and halt the downturn in PPI. This week’s action proves the point in flamboyant fashion.

After a moribund basing pattern fossil fuels are rallying as oil has broken out and will shortly test another resistance level, helped largely by the weak dollar. Across the oil futures curve prices are backwardated, which in the face of positive real rates and the potential for higher rates this summer, likely means traders see downside risk due to weak demand. So the pop in the dollar may be temporary but give sellers of gasoline and other consumer commodity goods a profit lift.

Precious and industrial metals have likewise rallied, helped by this week’s bond rally. Further upside will largely depend on stimulus policy coming out of China. And foods and softs have likewise rallied, so any continuation would eat into headline inflation figures. The array of negatives facing the bulls include many of the things they hope for, a situation that always resolves itself in a major correction.

My current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to an extremely short position in equities.