Even though the S&P 500 and Nasdaq 100 remain at or very near all-time highs, we’re getting one of the stronger sets of risk-off signals we’ve seen in a while. Which makes the continued rally in large-cap (and now small-cap) stocks all the more deceptive. These factors have the potential of reversing conditions sharply & suddenly and could spike volatility with little warning.

That pushed stock prices higher and bond yields lower; the kind of “everything is awesome” sentiment that’s been pushing the major large-cap averages to new highs for weeks. Thanks to the cyclical upturn, we see lumber/gold flip back to risk-on. The underlying reality may be a little more sinister.

Last week’s inflation data created a headwind for stocks, but a bigger one for bonds. If inflation is re-accelerating, it’s going to be challenging for Treasuries to act as a risk-off asset until something breaks and the flight to safety trade takes hold. That “something” could be Japan when the BoJ likely decides to end negative interest rate policy this week.