Thornton: Sentiment is Shifting in the Markets

Your Real Vision Daily Briefing for August 27, 2020

Senior editor, Ash Bennington, hosts Tommy Thornton, founder of Hedge Fund Telemetry, to take a pulse check on recent market activity.

  • Markets have been frothy as sentiment continues to heavily skew price action, but change is in the air.
  • While the “don’t fight the Fed” adage is usually right, the Fed may have done too much this time, and there may be a reckoning in the coming years.
  • The Fed’s push for inflation could lead to greater wealth inequality and problems for the financial sector.

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We’ve had one trade on with this market: long stocks, long bonds, long gold, long silver, long metals, and short the U.S. dollar, Tommy Thornton, founder of Hedge Fund Telemetry, told Real Vision during today’s Daily Briefing.

Thornton predicted that we will soon start seeing a reversal of this trade. He said that sentiment has been exceptionally skewed to one side on these trades and now it is beginning to shift: we’re starting to show signs in equities despite new highs; we’re seeing yields lift in bonds, which he believes will trigger further bond selloffs; we’re seeing the dollar perk up; and gold had its Robin Hood spike and has come back down.

To confirm whether his theory is playing out, Thornton said he’s looking at the divergence with breadth.

“We’ve had lots of days of negative breadth and upside in the market, and that is a risk we’ve seen ahead of market pullbacks in the past,” he said.

He anticipates negative seasonality coming in the next two months and said we could see some selling happening more deeply after tomorrow’s expiration with a lot of gamma roll off. There could be more residual strength in next few days, but we are coming close with market sentiment, he said.

Thornton also discussed the Fed’s intervention in markets during the interview, and said that while “don’t fight the Fed” is generally right, they may have done a little too much this time and it is going to be a pay the piper situation in the next few years that could prove to be tough in the long run.

He pointed out that the announcement that the Fed will be doing average inflation targeting did not garner the type of reaction you’d expect, which would be a lift in a gold or silver, which could mean that investors are doubting whether the Fed can produce inflation.

Thornton also expressed doubt as to whether the Fed could deliver. “You couldn’t be at 2% when the target was 2%, so how will you get more?” he said. If they do manage to achieve higher inflation, Thornton said he expects another huge bout of income inequality and then they’ll have a whole other problem on their hands. Thornton also wondered if the Fed is trying to push for inflation, will they go negative on rates? If they do, it could create problems in the financial sector.

 “The Fed is in a box,” he said.

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