Taking the Global Reflation Trade to Task

The stock market rally is running hot, buttressed by three main factors that have yet to be verified.

They include the passage of tax reform, the appointment of a new dovish Fed chair and the notion of the global reflation trade that lifts all world markets, thanks to rising economic growth rates in developed and emerging economies. It is like having perfect growing conditions for exotic flowers.

The fact that the market doesn’t really get rattled about threats from North Korea’s dictator and crossing the $20 trillion debt threshold for the U.S. federal balance sheet makes this rally even more interesting.

Assuming one, two or even all three of these market catalysts come to pass, as is currently being priced into stocks, opens the way for the S&P 500 earnings to climb by another 10% or more. That is, the S&P 500 index could trade up to 2,800 over the next three to four months. Market technicians are citing the broad sector participation and yet one key indicator, Relative Strength Index (RSI), is flashing a short-term overbought reading and has a pretty solid track record of being a precursor to rallies and pullbacks.

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