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Unwinding the reflation trade
Since the start of this year, investors and traders have been betting on the reflation trades. These are bets that the Fed will let inflation stay high without slowing bond purchase or raise rates for quite a while.
But the Fed's announcement on 6/16 changed that equation. Not only did the Fed signaled that they are looking at raising rate in 2023, and starting to discuss tapering bond buying, they also indicated that they will move to address the effects of inflation on consumer and business behavior, rather than tolerating it for a while.
So immediately after the announcement, $SPX IWM began to sell off while $NDX climbed higher. There is a high probability that this rotation will continue a while longer yet, until $NDX becomes overbought again.
Investors and traders are now betting that the Fed will act more quickly against inflation, which will lead to slower growth and lower interest rates in the long term. This is most evident in the fact that yields from shorter dated Treasury bonds (IEF, US10Y) have risen, while yields on 20+ years Treasury bonds (TLT, US30Y) have dropped. You may read about the flattening of the yield curve. This is what it's about. This flattening is seen as bad for bank stocks.
From a really big picture perspective, there is no indication that market participants are worried about a recession or an overheated economy. Not too hot. Not too cold. We may actually be looking at Goldilock condition for the economy (where the porridge is just right).
So there is no crash signal on the horizon. That doesn't mean we won't see a major pullback at some point for $SPX $NDX IWM. But not right this moment.
Read the rest of this analysis, and get the latest entry/exit signals for SPY QQQ TQQQ IWM SPX NDX based on VIX here.