The mother of all reflation trades has inflated equities and commodities off the February lows. Since February 11th, the CRB index of commodities is up 18.8% while, over that same period, the S&P 500 is up 11.5%.
Not so fast.
Before buying into the latest permabull narrative that U.S. #GrowthSlowing fears have abated so buy equities now, consider this. Once again, macro markets have already begun letting out some of the rally's hot air. Note: The S&P 500 was down for 4 of the last 6 weeks, meanwhile, net positioning is the most bullish it’s been all year (CFTC data).
So what are we watching?
Top of the list is the U.S. dollar. Here is analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:
"Down Dollar (again) -2.2% last wk (-5.7% YTD) after both the PMI (50.4) and Consumer Confidence #s slowed (again) on Friday; markets are obviously questioning whether Dovish Fed can replace actual growth with some version of stagflation, but USD is signaling immediate-term oversold inasmuch as Gold is signaling overbought."
How do you play the oversold U.S. Dollar? Well, indirectly at the moment, McCullough says.
"Instead of buy USD (not brave enough, yet!), I sent out SELL signals in both Oil (+5.2% last week) and Copper on Friday; both are signaling overbought inasmuch as USD is signaling oversold; Copper $2.31 is an important macro level for the stagflation vs. #Deflation debate; so far longer-term #Deflation is still winning."
Here's the sell Oil signal in Real-Time Alerts:
U.S. #GrowthSlowing has been our call for a while now. We're sticking with it.
For more, watch the video below in which Hedgeye Senior Macro analyst Darius Dale explains why the U.S. Economy is entering "the most difficult part of the cycle."