We are approaching the deadline. You know the one I am referring to. No, not the 'drop dead date' upon which we can't agree whether it is June 1, June 2, June 15 or some other date.

The deadline I am referring to is the unofficial start of summer - Memorial Day. After this date, schools start to finish, bbq's start, travel sports accelerate & family vacations begin

This is the time when portfolio managers move closer to their benchmarks so that they have less tracking risk on the books and can feel more comfortable taking time away

No one wants to get the call from the office about a big move in the mkt or in a position forcing you to stand beyond the right field fence on a dusty field in Iowa so you can hear what they are saying. Trust me, I have done it

This applies to long only and to hedge fund investors alike. Bigger positions get reduced. Divergences begin to narrow. Perhaps we see some mean reversion kick in instead of the momentum that permeates the mkts due to the passive influence

One of the divergences that stand out in my mind is that between the SPX and the 10yr yield (inverted in today's chart). For the past 18 months, these have moved pretty much in lock-step. Any divergence has been closed. The bond mkt has usually led

The bond mkt again seems to be leading. 10yr yields have moved back up to 3.74% from the lows around 3.3% hit in April. The bond mkt may be feeling either 1. the debt ceiling issue will cause some wobbles or 2. it will be solved & heavy issuance will start

Either way seems to point to some higher yields. Higher yields means a higher cost of capital for equities. A higher cost of capital means a higher earnings yield or a lower multiple. It probably means lower earnings too but lets not go there yet

There are those that will point to goods deflation. Others want to point to lower house prices. However, services inflation is NOT falling as fast as people think. Inflation, as least that JayPo cares about, may be stickier than we think. Higher for longer may be the narrative

My bet is this divergence closes. Of course, it could happen with higher stocks and lower yields. It could also happen with lower stocks. We will see what PMs choose ahead of the deadline, you know, the Memorial Day deadline

Stay Vigilant

#markets #investing #stocks #bonds #deadline #stayvigilant