Patient Pause

It's hard to be patient. This week, as I help care for my grandsons at my daughter's home in BC, that thought is front of mind. They are wonderful kids, but they try your patience sometimes.

In the age of instant messages, on-demand, and binging, the concept of waiting patiently seems antiquated. Humans are impatient by nature, but wait, we must.

Now that the FED has gotten out of the way and the market has risen dramatically, it is incumbent on the economy to prove to investors that they have made the right choice. The earnings parade that kicked off this week is not going to help prove if markets have it right. These data will only serve to create a pause for reflection. Since the 'look over the valley' crowd are the ones responsible for the market rally, they unlikely to sell now based on 'old' news.

The disbelievers, including me since S&P 2750, are left to wait for a correction or to play some sort of laggard catch-up game. Leadership from technology/growth has been firmly re-stablished. Is the 'left-behind rally' still on track?

Let's go to the video.

Starting with the bond market and the now widely discounted yield curve inversion, there is little encouragement yet. Although the 2yrs-10yrs have yet to confirm the 3mo-5yr inversion, longer dated bond prices have held most of their gains (chart below). The inversion at the front end has yet to achieve levels seen in the last two recessions but it needs to reverse sharply here to convince markets that the all clear has been blown. It would help if the bond market completely "un-inverted" itself for a while, like in 1999 and 2006. That would buy the market more time for one last push. I do remember recently saying that at 2.38% on the 10 year that bonds were a 'sell'. Come on $TBT!

Treasury Yields: 5 Year Minus 3 Month

The hoped-for leadership rotation from Growth to more Value-based equities is still nowhere to be seen (chart below). That stands to reason, in an environment of deceleration. There has yet to be sufficient confidence-inducing stimulus in the form of fiscal and trade policies for the markets to fully embrace a belief believe in accelerating global growth. This chart needs to 'double top' right here to convince markets of a play on laggard Value, likely led by the despised banks.

iShares ETF: Growth/Value

The recent 'stall-out' in the copper market (chart below) correctly depicts this lack of confidence in an economic acceleration. A definitive break above $3 would go a long way to confirming the recovery in global growth. If ever we needed a 'Head and Shoulders" base formation to resolve higher, it is this one!

Copper Price

There are many positive signals for the global growth bulls to cheer, but most are sentiment driven, especially stock prices themselves. Is the Chinese market correctly predicting a resumption of growth there or is this another head-fake? Chinese export data were somewhat encouraging last week but more proof is needed.

Similarly oil prices are getting a bit frothy as the combination of Iran sanctions and strongly positive seasonality combine to encourage the 'Large Spec' crowd to pile in the the front end of the futures curve. The strong backwardation in oil is telling, indicating a temporary shortage only. Oil stocks are being dragged into the rally kicking and screaming.

I'm looking for more evidence before committing entirely to the reflation case. For now, we just have the monetary easing to go on. We need to see the whites of the eyes of a global reflation before going all-in.

Tom Petty had it right: "The waiting game is the hardest part."

Risk Model: 4/5 - Risk On

The overbought conditions continue to confound the bears, causing the only one negative signal - the RSI is above the 70 line.

All else is in risk-on mode, as AAII investors are almost 2:1 bullish and volatility is collapsing. With Gold breaking down from a top, the Copper/Gold ratio is threatening 6 month highs.

The model has been relentlessly bullish since the end of January. The signal it gave at around S&P 2650 reversed the October the 4th sell signal at 2900. Although it didn't catch the bottom in December, there was a good chunk of value creation from this simple tool.