U.S. equities finished mixed on Monday in relatively quiet trading. Traders aren’t interested in making any big moves as the Federal Reserve kicks off a two-day policy meeting on Tuesday. As a result of ongoing labor market strength, increasing inflation pressure and evidence of rising wages, futures market odds of a March rate hike are now above 95%.
This sets the stage for the second rate hike in three months; a marked acceleration from the current pace of two rate hikes over the past ten years. With stocks overextended amid dangerously narrow breadth measures, as buying interest has focused on a relatively small group of momentum stocks, the situation looks vulnerable. Especially with “risk parity” funds once again under pressure amid weakness in commodities, crude oil, small-cap stocks and Treasury bonds.
In the end, the Dow Jones Industrial Average lost 0.1%, the S&P 500 gained a fraction, the Nasdaq Composite gained 0.2% and the Russell 2000 gained 0.4%. Treasury bonds were weaker across the curve, the dollar was little changed, gold gained 0.1% and crude oil extended its selloff down another 0.2%.
The weakness in crude oil pushed the ProShares UltraShort Crude Oil (NYSEARCA:SCO) recommended to Edge subscribers to a gain of more than 20% since the beginning of February.
Materials and utilities stocks — an odd coupling — led the way with gains of 0.3% and 0.2%, respectively, while healthcare was the laggard, down 0.2%, amid ongoing political bickering over the Obamacare replacement legislation working through Congress.
On the corporate front, the big news was the $15.3 billion deal by Intel Corporation (NASDAQ:INTC) to buy autonomous vehicle systems provider Mobileye NV (NYSE:MBLY) representing a 34% premium to the prior close. On the downside, GameStop Corp. (NYSE:GME) fell 3.9% after being downgraded by analysts at Telsey Advisory Group on a softer video game outlook, a disappointing holiday season and an accelerating shift to game downloads.
Keep an eye on growing weakness in bonds and commodities, as shown in the charts above, in a clear sign (already suggested by the weakness in small-cap stocks) that the post-election “reflation” trade is waning.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers. Redeem by clicking the links above.