Stock Market Forecast for the Week Ahead: Reflation Trade Reignited

Stock Market Forecast:

Stock Market Forecast for the Week Ahead: Reflation Trade Reignited

The Dow Jones and S&P 500 notched modest gains Wednesday as the Nasdaq 100 bled slightly lower. Disjointed price action in recent sessions has sparked a revival in discussion around the reflation trade theme which originally gained popularity in the first quarter when large technology stocks first began to stumble. The reflation trade theme can be roughly measured through a ratio of the Nasdaq 100 to the Dow Jones.

Nasdaq 100 to Dow Jones Ratio Dives Lower

The ratio fell to its lowest level since late March on Tuesday, despite modest moves in US Treasury yields which had been the most recent catalyst behind weakness in technology stocks. Price action into the second half of the week, while tepid thus far, might suggest further strength for the Dow Jones relative to the Nasdaq 100.

Recent changes in IG client sentiment data also suggest the Dow may continue higher in the days ahead as short interest spikes alongside dwindling long exposure. Since we typically take a contrarian stance to crowd sentiment, the indicator offers a bullish contrarian bias. In the meantime, follow @PeterHanksFX on Twitter for updates and analysis.

–Written by Peter Hanks, Strategist for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

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