Those who follow this thread would have heard me say quite frequently that markets respond to changing narratives and that to BE AHEAD of the Curve we need to be cognizant of such changes and be willing to respond accordingly.
It wasn't long ago that we had the vaccine narrative in Sept/Oct which provided tailwind for the equity rally and headwinds to the gold trade. It wasn't surprising then that Gold peaked then. Then we had the Blue wave narrative and the markets liked it. In every case, the market reacted well in advance before the event, well before the vaccinations and well before Jan 26 Biden inauguration.
This time we have the inflation fears narrative , not so much the fear of inflation in itself but that higher inflation would likely hasten the Feds tightening of rates earlier than expected, and which manifest in higher 10 yr yields. Again the market is factoring well in advance, at this point the market has all factored the expected stellar economic recovery in US , the question is whether the recovery plus the effects of the 1.9T stimulus will bring the higher inflation and therefore higher bond yields to threaten the markets.
So the prospect of a market top is nearing because any of two scenarios threatens the end to this large rally. Under a recovery scenario with higher inflation worries, higher bond yields will end the rally , which has been mapped out by Chris Vermeleun in my post earlier. The other scenario is that a mutated virus derails the vaccine recovery and global economies enter into a double dip recession, which would be a greater negative to the markets. The lofty position the equities market is at that is so disconnected with economic fundamentals places it in a precarious susceptibility to such impending threats.
The best case scenario would be for the markets to rid its froth via a more meaningful short term correction and then hope for earnings and recovery to be robust enough to narrow the gap while not at the same time fueling inflation.
Until such time that 10yr yields can get down below 1.2pc, it could continue to be albatross around the markets neck in the coming weeks and months.
