Once again we find heavy volatility in the financial markets, with stocks generally remaining near upside breakout levels and Treasuries making a significant downward adjustment. In the equity market’s defense, the Trump situation has at least rekindled animal spirits, there is hope for tax reform, and there is talk of infrastructure spending. However, with equities seeing competition from Treasury yields and the Fed seemingly honing in on an increase in rates next month, the stock market will need to see a lot of things come out very positive to justify a move up through all-time highs.
In the coming weeks it might be folly to go against the stock market, as holiday sales and the potential of “change” from the election could make a “buy the rumor” rally possible into the end of November. But we suspect that rising Treasury yields will eventually trip up equities, and we want to attempt to use the near term upward bias to finance a longer term look at the short side into the second week of December.
The stock market looks to continue to price geopolitical and economic conditions to perfection, but an end to the low-rate era is on the horizon. We think a December hike is set to be more than priced into Treasuries and that political wrangling and obstruction in the New Year will result in a violent January trade in stocks and bonds.
– David Hightower