Key Tactical Takeaways:
> Ahead of today's Fed rate decision, the ...% area is of epic importance. As long as 10s remain offered against this level, the trend will favor an immediate move toward higher rates to start 2021. Failure to hold this level on a closing basis, however, would hobble this outlook.
> Although the S&P looks poised to test and possibly overshoot to new highs, we would use any high-volume spike to the ... area to take tactical profits.
> Oil is "strong like bull," as it remains on track for the Tactical Liquidity Zone between $... and $....
> Given the lack of favorable net positioning by commercial hedgers, gold's recent rebound is anticipated to end up being a .... In the meantime, measured upside potential extends to between $... and $....
> As we noted on our private Twitter feed (@XtractPremium) yesterday, profit taking on our WMG long is warranted now that the 33.99 target has been met. Pending a close < 32.46, however, we're letting profits run.
Some Quick Thoughts:
Sentiment and investor opinions govern daily price movement, not fundamentals. This daily price movement develops against a backdrop of larger trends that are currently being shaped by massive amounts of fast money chasing a relatively small number of narratives. Perhaps the narrative most important to us has been the highly correlated dance between inflation expectations and US equities ever since monetary support became the only game in town again in the wake of the Covid collapse. On page 8, you'll find an updated chart of this relationship, where the S&P 500 and 5-Yr, 5-Yr Forward Rate sit near new highs.
This afternoon, we'll be treated to the final Fed rate decision of the year. Just as trading desks get ready to close up their books for the year, benchmark 10-Yr rates are resting on what is an immensely-important backstop (...%) as it pertains to the case for an ongoing push to higher rates. Of course, this reflects investors betting on the success of largely untested vaccines and the anticipation that a 1-2 punch of Yellen and Powell will make Keynsians stare in awe.
Let's face it, NOBODY knows for certain what 2021 is going to look like. While we as humans need to be optimistic, the fact of the matter is that serious risks, from mutating virus strands, major vaccine side effects, mass refusal to vaccinate, full democratic control (think higher taxes) and a politically-induced bursting of the tech bubble, are still out there. The only thing we as market participants can do is monitor price. On that note, pay attention to all the cross-asset bullets provided in this letter.
As we continue to monitor price, we will be diverting our attention away from the S&P 500 in 2021 for two main reasons: First, the manipulative effects of massive monetary support will dismantle price discovery even further. Second, we anticipate that small-to-midcap stock picking and ETF selection are where the money is going to be made. For this reason, we'll be rolling out two new products in early 2021 to take advantage of this.
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