Early Update – Reflation Unwind

10:07 a.m. ET

In the weekend video I demonstrated how cyclical sectors that should benefit from a higher yields in a reflationary environment outperformed last week, like the banks, while the secular growth/high valuation stocks fared less well amid higher yields due to valuation pressures, like Technology. This morning that’s reversed with yields lower, and evidenced in NASDAQ-100’s better relative performance, and Small Caps’ worse performance.

SP-500 -0.8%, Dow -1.35%, NASDAQ-100 +0.1%, Small Caps -1.4%

All 11 sectors are red, but the cyclicals are worst like Energy -2.5%, Financials -1.9% and Industrials -2%. The sectors down the least are mega-cap heavy Communications -0.4% and Technology -0.35%.

Yields at the long end are down -3 to -4 bp, in curve flattening trade causing the Banks (-2.2%) to underperform.

The U.S. Dollar Index is up +0.3%, but hasn’t changed trend.

U.S. Dollar Index (30m) – it is possible that the former bull flag (a little too extended, retracing too much to be a flag now) is still a bullish cup and handle with the former flag being the handle.

After a 3 week lateral 5% range, Crude (-2.8%) is dropping below the range.

USO (30m)

While the S&P is down, its trend is also unchanged.

SP-500 (15m) If Friday’s breakout attempt has been more serious and had pushed higher, the failure of that breakout this morning would likely have been much more bearish as a failed breakout, but Friday the attempt was half-hearted and didn’t get far. As a result, it looks likely that the S&P will find at least some temporary support at the $3420-$3425 area where it found support last week.

The Dollar Yen is still in last week’s flag-like consolidation.

USD/JPY (30m) we’ll obviously want to watch this closely since the price behaviour last week was risk-off, not exactly what you want to see when the S&P is trying to breakout to the upside.

For the moment, I expect the 2 week correction for the is going to continue.