Wednesday, 12 July 2017

Resumption of the Reflation Trade ?

Right off the bat of Trump Election victory on 8 Nov 2016, the market immediately put in place the so-called Trump Reflation or Trumpflation Trade, aka Trump Rally or Trump Bump. It's a stunning price rises of the whole industrial metal complex, and 10 year T-Note yield, which carries the financials higher.

You can read my article Trump Victory and the Market's Roller Coaster Ride for the explanation of this Trumpflation Trade.

But by sometimes in mid-Feb 2017, the whole Trumpflation is being questioned, and a repricing or correction has started. To read in-depth about this Trump Dump, you can read my article Is Trump Rally Over ?.


It appears that the Trump Dump is over, and the Reflation Trade can now resume in earnest.

Let's look at the evidences for this Reflation resumption.


XLF peaks on 1 March and bottoms on 13 April, and breaks out of the downtrend in 7 June
XLF peaks on 1 March and bottoms on 13 April, and breaks out of the downtrend in 7 June this year

Copper ETF peaks on 13 Feb and bottoms on 8 May, and breaks out of the correction on 8 May this year
Copper ETF peaks on 13 Feb and bottoms on 5 May, and breaks out of the correction on 19 May this year

SLX ETF peaks on 21 Feb and bottoms on 18 May, and breaks out of the correction on 26 June this year
SLX ETF peaks on 21 Feb and bottoms on 18 May, and breaks out of the correction on 26 June this year

The general trend is clear. Trump Bump starts on Nov 2016 and peaks in sometimes from mid to late Feb 2017, and then the Trump Dump starts and finishes sometimes in May 2017. By June 2017, financials, and the industrial metal complex (starring Dr. Copper) have resumed its upward trend.

Bear in mind that the financials and the industrial metals have been in the bull market since early 2016. As i explained in  Is Trump Rally Over ?. The Trump Bump is simply a transient 2-month spike within this ongoing reflation theme that started in early 2016. What happened between Feb and June 2017 is simply a correction within the context of this ongoing reflation trade. It looks like that correction is over last month, and the industrial metals and financials are in their upward path again.

Even the uranium, which isn't an industrial metal, but it's part of the commodity complex, has followed similar path. It has corrected the most, but has broken its downtrend, put in a bottom in June 2017. It has now resumed its upward path. Its bottom in June 2017 is still higher than its bottom in Nov 2016, which coincides with the election day. In fact, you could say that URA has completed its inverse head and shoulder, which is a reversal pattern.

URA ETF peaks on 15 Feb and bottoms on 22 June this year
URA ETF peaks on 15 Feb and bottoms on 22 June this year

Initially, i thought that crude oil (WTI) has further to drop until it gets bellow $40, perhaps finds a bottom in around $38. But having looked at the whole commodity complex from industrial metals to uranium, all seem to have bottomed and reversed course, i'm now thinking that crude is also doing the same thing. If you look at this chart below, the crude prices have never done this since its peak on 23 Feb this year; it seems to be trying to consolidate, rather than bouncing straight up and down between channel's edges.


WTIC ETF peaks on 23 Feb and bottoms on 21 June this year 2017
WTIC ETF peaks on 23 Feb and bottoms on 21 June this year

As a trader, i don't really need any explanation as to why this is happening. I only need to know what is happening. But if i'm pressed to label it, i'll call this the Xi Reflation Trade (as supposed to Trump Reflation, which, as far as the market goes, is dead in the water. Even CNBC has stopped using the "Trump Rally" slogan for some months). Whenever you see rising commodity prices, you can safely assume that it's driven by China.

Ah yes, the Fed, which is the architect of the ongoing reflation trade, is sounding more dovish again. Let's call this the resumption of the Fed-China Reflation Trade. Leave Trump out of it. The market does fine without him (although he insists that he's responsible for this bull market that predated his election for 9 months). He has delivering nothing so far except D.C. dramas aplenty. Treat it as white (sorry, orange) noise.




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