Disinversion Day

The yield curve has got its rizz back.

In its classic form, an inverted yield curve exists if the yield on 2-year bonds exceeds that of 10-year bonds. When the inflationary post-COVID recovery got going in 2022, the 10-year bond experienced a generational bear market. The Fed quickly followed suit by raising short-term yields well above the longer-term equivalent. The economic implications were evident—a recession was coming, as always. But, sorry, Charlie, it never came.

The novel effects of the COVID monetary and fiscal responses obviated the need for a classic recession. U.S. exceptionalism is on full display, as depicted in the GDP Now chart below. The latest rally means it's a bear market for Bears.

Atlanta Fed GDP Now

So, are we expected to trust the current bullish implications of this month's disinversion signal just because the inversion signal didn't work? It's only one data point, I guess. Due to the epidemic response and the now-imbedded fiscal largess from profligate Washington, America has survived the inversion threat unscathed. We can pay that piper later; it's time to chase the bull market.

US Treasuries: 10Y - 2Y

Disinversion, a word salad combination of recent making, is a much-needed driver for a market that desperately needs one. The U.S. banks are reporting better-than-expected earnings, and investors are cheering. That is the effect of the disinverted curve at work. The resulting easing in financial conditions is evident in the broadening of market participation. It's "don't fight the Fed" time on Wall Street. The equal-weighted S&P has broken out now with rising volume plurality (chart below).

Equal Weighted S&P500

Bears are being left scratching their heads and wondering what happened, and record levels of sideline cash are being deployed into a seemingly expensive market. With rates receding and earnings expectations rising again, valuation is the last remaining bear argument. But a skew toward the mega-cap tech heavyweights inflates the seemingly expensive market. Score another one for the bullish case. There are lots of cheap stocks to buy.

S&P Valuation: Mega-cap vs Rest of S&P 500

So, the market message is clear. Buy now and pay later.

Dont worry, be happy, it's Disinversion Day!

Risk Model: 1/5 - Risk Off

Even the model is confused about what's happening. The elevated VXV, plunging Copper/Gold ratio, and the overbought conditions are screaming sell, sell, sell! Nobody told the crowds of buyers lapping up equities in a rapidly expanding market.

The AAII ratio wedge I depicted last week has broken out to the upside. Buyers are swamping the sellers now as the last worry - the election - seems to be a non-issue now with a likely split Congress that will give rise to an era of benign policy inertia.

What's the definition of a bull market? More buyers than sellers.

AAII Sentiment: Bulls/Bears