Markets Have Yet to See a ‘Deflush,’ Strategas’ Verrone Says

"I'm not convinced we've really seen a deep flush here yet... we're sitting here with about 40% of the S&P above the 50 day. We really haven't seen the big surge and new lows yet. The call ratio remains pretty benign." Markets typically need a washout of weak hands (capitulation) before establishing a durable bottom. Without a spike in new lows or a fearful put/call ratio, the market remains vulnerable to a sudden, sharp drawdown to clear out excess optimism. WATCH broad market indices for a spike in new lows and bearish sentiment before deploying fresh capital aggressively. The market could simply grind higher without ever delivering the "flush," causing investors waiting on the sidelines to miss the continuation of the uptrend.

"It's crazy to me that you see all these narratives being written that central banks are going to tighten into this. I think central banks have learned along the way you don't tighten into energy shocks. I think if anything... we should be talking about more cuts, not less cuts down the line." The market is currently pricing in hawkish central bank behavior due to inflation fears from an energy shock. However, if the Fed prioritizes growth and cuts rates instead of tightening, long-duration bonds will aggressively reprice higher as yields fall. LONG long-duration Treasury bonds as a contrarian play against the narrative of central banks tightening into an energy-driven economic slowdown. If inflation becomes unanchored and forces the Fed to actually hike rates despite slowing growth (stagflation), long-duration bonds will suffer severe drawdowns.

"Our barometer to really economic growth or how the market perceives growth is what is consumer discretionary doing relative to consumer staples? Now, we've seen a modest correction in that pair over the last five or six weeks." Consumer Discretionary (XLY) relies on a strong, spending consumer, while Consumer Staples (XLP) is a defensive sector bought during economic fear. The relative performance of this pair acts as a real-time leading indicator for the broader economy. WATCH the XLY/XLP ratio. If XLY resumes outperformance, the economic growth narrative is intact. If it continues to break down, it signals a defensive rotation and a weakening consumer. Sector-specific anomalies (e.g., a massive move in Amazon or Tesla, which heavily weight XLY) could skew the ratio, providing a false signal about the broader consumer economy.

"It's really essential to us things like that or banks or industrials can respond out of this. I think if there's a bigger problem developing, we probably still rally first. We learned about it in the summer as the real cyclical stuff starts to roll back over." Cyclical sectors are highly sensitive to economic expansions and contractions. They are expected to bounce in the near term due to the broader market uptrend. However, if these sectors fail to sustain their momentum and roll over during the summer, it will confirm that a deeper macroeconomic deterioration is underway. WATCH Banks and Industrials for a near-term relief rally, but use their summer performance as the ultimate tell for whether to derisk the broader portfolio. Cyclicals could chop sideways, providing no clear signal, or a sudden exogenous shock could cause them to roll over immediately rather than waiting for the summer timeline.