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Weekly Memorandum 10/5/2020

Stocks gapped up higher to start the week, which is usually a very bullish sign, so long as they finish the day higher. This comes after President Trump's apparent progress on his COVID-19 infection. Last week's memorandum stated, "Equities are up nicely after forming what may have been an important pre-election bottom last week." This is looking even more likely now. Keep in mind that markets are known to be a discounting mechanism, which means they trade off future expectations versus present events.

We also note the continued weakness in Treasury markets, which is actually bullish for equities in the short-term. As a rule of thumb, rising rates are bullish for stocks up until interest rates on bonds exceeds the dividend yield of equity indices. Ever since the era of QE began, investors have been starved for yield. This has driven income-seeking capital into equities where dividend yields have been higher than interest yields. But when the day returns that interest rates pay more than dividends, we could see that capital return to bond markets to obtain more "secure" or "guaranteed" returns on investment.

Rates are rising in response to the dollar's current decline. However, there may come a point where foreign capital seeks out higher-paying, dollar-denominated assets. At such point, we could see interest rates and the dollar rise together. This continues to be on our radar.

Crude Oil is also surging, and precious metals are higher too. The 'Big 3' cryptocurrencies (Bitcoin, Ethereum, Litecoin) are mixed, with Bitcoin and Ethereum marginally higher, while Litecoin trades lower. Litecoin continues to lag the other two, and probably should be avoided for the time being.

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