The Dark Side of Reflation

Higher economic growth usually translates into higher bond yields, higher stocks and rising oil prices; but, too much of a good thing is bad for stocks. Over the past few weeks, we’ve shown that our stock/bond RSI signal has triggered. We now have an Inflationary Pressure Sell Signal as well. This looks at when oil, gold and yields have been rising together. These signals don’t always overlap, but when they do, the returns have generally been poor.

When stocks become very stretched relative to bonds, generally longer-term investors such as pension funds, insurance companies, and family offices are forced to rebalance away from stocks towards bonds. Normally, selling of stocks begets further selling of stocks, and not everyone can exit their positions at the same time.  (Click on charts to enlarge.)