Stay bullish on stocks, bearish on commodities as deflation clouds gather, says this quant strategy

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Markets ripped a page right out of The Lego Movie songbook on Monday, with an “Everything-is-awesome,” session — the highest close for the Nasdaq?COMP,?+0.50%?since August, and continued falling demand for 2-year Treasury bonds and gold.

It’s as if investors are watching?the U.S. debt ceiling saga?like “an American film knowing that there will eventually be a happy ending,” says Swissquote Bank’s Ipek Ozkardeskaya. For Tuesday, equity futures are pointing to some wobbles ahead for the S&P 500?SPX,?+0.02%,?though less so tech as Washington watch continues.

Onto our?call of the day?from?Prometheus Research, which sees promise in a strategy that’s bullish on stocks and bearish on commodities.

“The combination of these bets is particularly interesting in a macroeconomic context— if they continue to trend, it will likely further current market pricing of disinflation,”?says Prometheus, whose researchers use quantitative analysis to understand underlying mechanisms driving the economy that can indicate future market trajectories.

The below chart offers a summary of the potential long, short and neutral asset positions based on their trend process:

“Currently, we are seeing a range of potential trends — most of which are skewed the short side. The strongest signals are currently short commodities (WEAT?WEAT,?-0.16%,?CORN?C00,?1.01%,?SOYB?SOYB,?+1.59%,?DBC?DBC,?+0.09%?) and long equities (SPY?SPY,?+0.04%,?XHB?XHB,?-0.98%,?XLK?XLK,?+0.19%,?XLC?XLC,?+0.91%?),” said the Prometheus team.

The takeaway is that if these trends keep up, investors could see the market keep pricing towards deflation. And their market regime monitor is indicating a rising probability of low growth, low inflation (third column over, in blue) ahead:

The Prometheus view fits with the economic outlook expressed by Steve Englander, head of North American macro strategy at Standard Chartered, who looked at tax receipts for May. “We think inflation and the economy are decelerating more than many in the market and at the Fed believe,” he said.

Also read:?Stocks were the only positive asset class over the last decade, adjusted for inflation

The markets

Stock futures?ES00,?-0.28%?YM00,?-0.24%?NQ00,?-0.31%?are tilting negative, as bond yields?TMUBMUSD02Y,?4.384%?push higher, with the 10-year?TMUBMUSD10Y,?3.745%?up 4 basis points at 3.75%. Two-year bond yields are up?a 9th straight session after hawkish Fed talk. Oil?CL.1,?1.36%?is flat and gold?GC00,?-0.74%?and silver?SI00,?-2.29%?are falling as the dollar?DXY,?0.28%?moves up.

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