Momentum Monday – Unwinding of the Inflation Trade


The charts in this video are powered by MarketSmith

For the better part of 2021 so far, value stocks have outperformed growth stocks. The reason – the market was trying to price inflation not seen since the mid 2000s. As a result, the U.S. Dollar and the U.S. Treasuries took a dive while financials and basic materials skyrocketed. In the meantime, almost anything software or clean-tech related lost 30% to 80% in just a few months. It seems the market was woken up to the possibility that the inflation dangers might have been exaggerated or the fact that the Fed is actually ready to step off the gas. 

Starting about two weeks ago, the whole inflation trade has been unwinding. What went up, pulled back. What was under pressure, has been rallying. Financials (XLF) are now down 9% from their 52week highs, basic materials (XLB) are down 6%, industrial metals (XME) are down 14%, homebuilders (XHB) are down 13%. Meanwhile, software stocks have been reborn. Many of them have been on a 30-40% ramp. Now, the big question is can the Nasdaq Composite continue higher while most non-tech sectors are pressured and already below their 50-day moving average. I think it can. Capital is not leaving the stock market. It is merely rotating between sectors and right now it’s tech’s time to shine. How long this is going to last is anyone’s guess. The market is a fickle machine. One day soon, it might decide to assume the inflation narrative again and start another rotation. There’s no reason to guess when. Price action will leave plenty of clues.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary and actionable swing, intraday, and position trade ideas, the Momentum 40 list of market leaders, and much more. See some of the recent testimonials.

PERFORMANCE

Here’s a Google spreadsheet tracking all closed options and stock ideas shared on my private Twitter stream and emails for subscribers.

Check out my free weekly email. to get an idea of the content I share with members.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.